Table 9.1 shows the marginal private benefit and marginal private cost schedule for a certain product. $$\begin{array}{l}
\text { Table } 9.1\
\begin{array} { l l l l l l l l }
\hline \text { Price (\$) } & 2 & 3 & 4 & 5 & 6 & 7 & 8 \
\text { Marginal private benefit } & 14 & 12 & 10 & 8 & 6 & 4 & 2 \
\text { Marginal private cost } & 6 & 8 & 10 & 12 & 14 & 16 & 18 \
\hline
\end{array}
\end{array}$$ Suppose the external cost is $2 per unit and the external benefit is $4 per unit. (Hint: Draw a diagram.)
a) What are the equilibrium price and quantity for an unregulated market?
b) What are the equilibrium price and quantity if external costs are recognized but external benefits are not?
c) What are the equilibrium price and quantity if external benefits are recognized but external costs are not?
d) What are the most desirable price and quantity from society's point of view?
e) If government wanted to increase the quantity to the amount in d) above, what subsidy would it need to give to producers?
f) If government wanted to increase the quantity to the amount in d) above, what subsidy would it need to give to consumers?

Question

Table 9.1 shows the marginal private benefit and marginal private cost schedule for a certain product. $$\begin{array}{l}
\text { Table } 9.1\
\begin{array} { l l l l l l l l } 
\hline \text { Price (\$) } & 2 & 3 & 4 & 5 & 6 & 7 & 8 \
\text { Marginal private benefit } & 14 & 12 & 10 & 8 & 6 & 4 & 2 \
\text { Marginal private cost } & 6 & 8 & 10 & 12 & 14 & 16 & 18 \
\hline
\end{array}
\end{array}$$ Suppose the external cost is $2 per unit and the external benefit is $4 per unit. (Hint: Draw a diagram.)
a) What are the equilibrium price and quantity for an unregulated market?
b) What are the equilibrium price and quantity if external costs are recognized but external benefits are not?
c) What are the equilibrium price and quantity if external benefits are recognized but external costs are not?
d) What are the most desirable price and quantity from society's point of view?
e) If government wanted to increase the quantity to the amount in d) above, what subsidy would it need to give to producers?
f) If government wanted to increase the quantity to the amount in d) above, what subsidy would it need to give to consumers?

Quizplus · Accepted Answer

The Answer of Table 9.1 shows the marginal private benefit and marginal private cost schedule for a certain product. $$\begin{array}{l}
\text { Table } 9.1\
\begin{array} { l l l l l l l l } 
\hline \text { Price (\$) } & 2 & 3 & 4 & 5 & 6 & 7 & 8 \
\text { Marginal private benefit } & 14 & 12 & 10 & 8 & 6 & 4 & 2 \
\text { Marginal private cost } & 6 & 8 & 10 & 12 & 14 & 16 & 18 \
\hline
\end{array}
\end{array}$$ Suppose the external cost is $2 per unit and the external benefit is $4 per unit. (Hint: Draw a diagram.)
a) What are the equilibrium price and quantity for an unregulated market?
b) What are the equilibrium price and quantity if external costs are recognized but external benefits are not?
c) What are the equilibrium price and quantity if external benefits are recognized but external costs are not?
d) What are the most desirable price and quantity from society's point of view?
e) If government wanted to increase the quantity to the amount in d) above, what subsidy would it need to give to producers?
f) If government wanted to increase the quantity to the amount in d) above, what subsidy would it need to give to consumers?

Table 91 Shows the Marginal Private Benefit and Marginal Private Cost