2. Given the graph below: What is the equilibrium price and quantity if this is

Question

2. Given the graph below: What is the equilibrium price and quantity if this is an unregulated market? What is the external benefit measured in dollars? (Assume the external benefit is the same along the the demand curve) a. b. c. What would be an appropriate solution for the government to mitigate this market d. What would be the outcome of the government's action. What would be the e. In a paragraph or two explain why the an external benefit is a market failure. failure? Be specific. regulated output and price? Price Supply Social Private costs External costs Supply Internal (private Costs 4 Demand Internal 70 98 Q thousands of packs of cigarettes 3. There are three ways to determine the price elasticity of a good or service: intuition, the total receipts test, and the midpoint formula The total receipts test: price 1 X quantity 1 total revenue 1 price 2X quantity 2 total revenue 2 If price rises and total revenue rises and visa versa it has an inelastic demand. If price rises and total revenue falls and visa versa it has an elastic demand. If price rises or falls and total revenue stays the same, it has unit elasticity

Explanation / Answer

a) Unregulated market has private demand and private supply equal to each other. This happens when the price is $7 and quantity is 98 units

b) There is actually an external cost and not benefit as the same can be seen in the social cost or social supply curve. This external cost is the vertical distance between private and social cost which is (9 - 4) = $5 per unit

c) Government can either impose a tax or can issue licenses to produce only socially efficient quantity. If there is a tax imposed, it should be equal to the external cost imposed which is $5 per unit

d) Government intervention shifts private supply curve up to coincide the social supply curve. Socially efficient quantity is 70 units and price is $9 per unit

e) This is an externality because it is affecting the society that is not participating in the market. When there are undesired costs imposed on parties not involved in market transactions, there is an externality in market.

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