Problem 11 Suppose the individual demands for wetlands (a pure public good) by the four citizens in a town are given by Q1 = 10 – P Q2 = 5 – 0.1P Q3 = 7 – 0.2P Q4 = 12 – 0.5P where Qi is the quantity of wetland demanded by individual i, p is individual i’s price (or willingness to pay) for wetlands.

Problem 11

Suppose the individual demands for wetlands (a pure public good) by the four citizens in a town are given by

Q1 = 10 – P Q2 = 5 – 0.1P Q3 = 7 – 0.2P Q4 = 12 – 0.5P

where Qi is the quantity of wetland demanded by individual i, p is individual i’s price (or willingness to pay) for wetlands.

a. Diagram the individual demand curves and the societal demand curve for wetlands.

b. Suppose there is a constant marginal cost of 65 to supply wetlands. What is the socially optimal level of wetlands?

Problem 12

Suppose that a chemical manufacturing plant is releasing nitrogen oxides into the air, and these emissions are associated with health and ecological damages. Economists have estimated the following marginal costs and benefits for the chemical market, where Q is monthly output in thousands of pounds and P is price per pound.

Marginal Social Benefit [MSB]=50-0.4Q Marginal Private Cost [MPC]=2+0.4Q Marginal Environmental Cost [MEC]=0.2Q
Your job is to:

a) Find the competitive equilibrium quantity (Q0) and price (P0).

b) Find the efficient equilibrium quantity (Q1) and price (P1).

c) Draw a graph of this market, showing the MSB, MPC, MSC curves, Q0, Q1, P0, and P1.

d) Find the dollar value of a Pigouvian tax that would achieve the efficient equilibrium.

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