Microeconomics 2nd Edition by Douglas Bernheim

Exercise 4

Inoculations create external benefits by reducing other people's exposure to communicable diseases. Suppose the market demand curve for inoculations is Q d = 100 - P , where Q d is millions of inoculations and P is the price per inoculation. Suppose also that the market for inoculations is competitive and that the market supply curve is Q s = 2 P 8. Finally, suppose that the external benefit of inoculations is EB = 8 Q + 0.75 Q 2. Find the socially efficient level of innoculations, the competitive equilibrium, the deadweight loss created by the externality, and the optimal Pigouvian subsidy. Draw a figure to illustrate your answer.