An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . The sum of the consumer surplus plus producer surplus at the market equilibrium (i.e. the equilibrium where production decisions do not take into account the externality) is:

Question

Quizplus · Accepted Answer

The market equilibrium occurs where MPC = Demand, so $Q = 10$. The price at this quantity is $P = 50$. Consumer surplus is the area of the triangle above the price and below the demand curve, which is $\frac{1}{2} \times 10 \times 10 = 50$. Producer surplus is the area below the price and above the supply curve (MPC), which is $\frac{1}{2} \times 10 \times 20 = 100$. The sum is $150.

An Environmental Economic Consulting Firm Is Hired to Measure the Negative