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 $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the deadweight loss from producing at the market equilibrium is

Question

Quizplus · Accepted Answer

The socially optimal level of production where MSC = marginal social benefit (MSB) occurs where the supply and demand curves intersect. In this case, we have:

MSC = 2Q + 30
MSB = P = 60 - Q
2Q + 30 = 60 - Q
Q = 10

Substituting Q into the demand equation gives
P = 60 - Q = $50

Therefore, the socially optimal level of production is Q = 10 and P = $50.

At the market equilibrium, the quantity produced is where the marginal private benefit (demand) equals the marginal private cost. We have:

MPC = Q + 30
Demand = P = 60 - Q
Q + 30 = 60 - Q
Q = 15

Substituting Q into the demand equation gives
P = 60 - Q = $45

Therefore, the market equilibrium level of production is Q = 15 and P = $45.

The deadweight loss (DWL) is the difference between the total surplus at the socially optimal level of production and the total surplus at the market equilibrium level of production. We have:

DWL = Total surplus at socially optimal level of production - Total surplus at market equilibrium level of production
DWL = (1/2)(50-30)(10) - (1/2)(45-30)(15)
DWL = $37.50

Therefore, the deadweight loss from producing at the market equilibrium is $37.50. The answer is B).

An Environmental Economic Consulting Firm Is Hired to Measure the Negative