If demand is given by P = 100 - Q, supply is given by P = 30 + Q and there is a negative externality of $10 per unit produced, then the socially optimal quantity is

Economics May 02, 2021

If demand is given by P = 100 - Q, supply is given by P = 30 + Q and there is a negative externality of $10 per unit produced, then the socially optimal quantity is...

65.

35.

70.

30.

Expert Solution

Given,

Demand (P) = 100 - Q
Supply (P) = 30 + Q
There is negative externality of $10
Hence,

Social Demand (P) = 100 - Q - 10 = 90 - Q
or

Marginal Social Benefit ( MSB) = 90 - Q
Marginal Cost (MC) = 30 + Q

Social optimality exist at MSB = MC
90 - Q = 30 + Q
or, 2Q = 60
or, Q = 60/2 = 30

Socially optimum quantity = 30 units

So, the correct option is D "30 units".

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