pace university|economics 310|yarbrough spring 2019 – assignment 1

1 Negative Externality

Suppose that the private market for widgets is characterized by the following supply and inverse

demand functions:

D : P = 10?Q

S : P = Q

1. Graph these functions in the graph paper below. Locate the private market equilibrium price

and quantity.

1

tani navani
pace university|economics 310|yarbrough spring 2019 – assignment 1

2. Now suppose that the EPA calculates that the marginal external cost of widget production is

characterized by: MD = $2. Graph the market with the externality and locate the the socially

e?cient equilibrium. How much dead weight loss was produced by the private market.

2

tani navani
pace university|economics 310|yarbrough spring 2019 – assignment 1

3. Now suppose that the EPA revises their MEC estimate to: MD = Q. Graph the market with

the externality and locate the socially e?cient equilibrium. Compare this with the outcome

from part 2.