PROBLEM 1: The demand curve for a particular good is given by its marginal private benefit function.
Let MPB = 24 - 2q, where q is the quantity demanded. Let the marginal private cost
function be MPC = q. Suppose that marginal social benefit is always double the marginal
private benefit
1. Graph the functions, and mark out the (i) the market equilibrium, (ii) the efficient
equilibrium.
2. Algebraically determine the market level of output and the optimal level of
output.
3. What is the welfare loss at the market equilibrium compared to the efficient
equilibrium? Show your answer on the graph and calculate it numerically.
4. What tax level would achieve the optimal level of output? What will be the
corresponding tax revenue? Show the optimal tax level and tax revenue on the
graph, and also calculate these numbers using algebra.