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April 8, 2021

a) State the efficiency condition and calculate the efficient level

Suppose market demand is P = 120 – 8Q and market supply is P = 40 + 2Q (assume that these represent social benefits and costs).

a) State the efficiency condition and calculate the efficient level of consumption and production, Q*, and the associated NB. Calculate P* and verify that CS + PS = NB in this case.

b) Illustrate your answers to (a) in a clearly labeled diagram.

c) Explain why Q = 5 is not efficient. Illustrate your answer using the diagram from (b).

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