What is the optimal output level

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Reference no: EM132196751

Question: Consider the case of a positive consumption externality. Suppose throughout this exercise that demand and supply curves are linear, that demand curves are equal to marginal willingness to pay curves and that the additional social benefit from each consumption unit is 10 and is constant as consumption increases. This external benefit is currently not being internalized in the market. Demand and supply are given by: P = 100 âˆ' Q; P = 10 + Q

The Social Marginal Benefit curve is given by: SMB = 110 âˆ' Q

a) Given the supply curve, demand curve and social marginal benefit curve, what is the current number of units being produced by the market?

b) Is the current market level of production for this good socially optimal? If not, what is the optimal output level? Explain using a graph.

c) What is the value of consumer surplus, the value of producer surplus, and the value of the external benefits of the market level of production?

d) Calculate the deadweight loss produced by not internalizing this positive externality.

Reference no: EM132196751

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