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Amityville has a competitive chocolate industry with supply curve Ps =440+Q. While market demand for chocolate is Pd=1200-Q, there are external profits that the citizens of Amityville derive from having a chocolate odor wafting through town. The marginal external benefit schedule is MEB =6-0.05 Q.
[A] Without government intervention, find the equilibrium amount of chocolate produced? What is the socially optimal amount of chocolate production?
[B] If the government of Amityville used a subsidy of $S per unit to encourage the optimal amount of chocolate production, what level should that subsidy be?

Microeconomics, Economics

  • Category:- Microeconomics
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