Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant.The private marginal cost,social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MC_P = 5 + 2Q
MC_S = 10 + 3Q
MB = 50 - Q
A competitive free market will produce ________ units,at a price of ________ per unit.

Question

Quizplus · Accepted Answer

The socially optimal quantity is found where the social marginal cost equals the marginal benefit. Setting MCs = MB, we get 10 + 3Q = 50 - Q, which solves for Q = 15. The price is then found by plugging this quantity into the demand curve: P = 50 - Q = 50 - 15 = $35.

Suppose a Firm Producing Roof Shingles Imposes a Negative Externality