Context: Consider the market for first-aid training classes. Market demand is given by P = 600 – Q. Market supply is given by P = Q. Individuals who have received 50 training are very helpful in some urgent situations which is captured in a positive spillover, or externality, equal to 1/4 Q. This is thus an external benefit related to the consumption of first-aid training. What is the deadweight loss if the externality is not dealt with?
Question
Context: Consider the market for first-aid training classes. Market demand is given by P = 600 – Q. Market supply is given by P = Q. Individuals who have received 50 training are very helpful in some urgent situations which is captured in a positive spillover, or externality, equal to 1/4 Q. This is thus an external benefit related to the consumption of first-aid training. What is the deadweight loss if the externality is not dealt with?
Solution
To calculate the deadweight loss, we first need to find the socially optimal quantity (Q*) where the social benefit equals the social cost.
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The social benefit is the sum of the private benefit (the demand curve) and the external benefit. The demand curve is P = 600 - Q, and the external benefit is 1/4Q. So, the social benefit is P = 600 - Q + 1/4Q.
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The social cost is the same as the private cost, which is given by the supply curve P = Q.
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Set the social benefit equal to the social cost to find Q*:
600 - Q + 1/4Q = Q 600 = 1.25Q Q* = 600 / 1.25 = 480
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Now, find the price at Q* from the supply curve (since P = Q):
P* = Q* = 480
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The quantity at the market equilibrium (Qm) is where the demand curve equals the supply curve:
600 - Q = Q Qm = 600 / 2 = 300
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The price at Qm from the supply curve is:
Pm = Qm = 300
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The deadweight loss is the area of the triangle formed by Qm, Q*, and the demand curve. It's given by:
DWL = 0.5 * (Q* - Qm) * (P* - Pm) DWL = 0.5 * (480 - 300) * (480 - 300) = 18,000
So, the deadweight loss if the externality is not dealt with is 18,000.
Similar Questions
Consider the market for first-aid training class.Market demand is given byP=600-Q Market supply is given by P=Q Individuals who have received first-aid training are very helpful in someurgent situations.More specifcally,first-aid training will generate apositive spillover equal to 3/4Q What is the deadweight loss if the extemality is not dealt with? DWM=40,500 None of the other answers is correct DW1=20,250 DWM=40.000 DWL=20,000
How do externalities contribute to deadweight loss? A. They create efficiency in resource allocation B. They lead to overproduction and underproduction C. They have no impact on resource allocation D. They cause underproduction of goods
What is the deadweight loss associated with monopoly in question 1?
What leads to a deadweight loss in a market? aExcessive production compared to demand bEquilibrium price being too low cInefficient market outcomes reducing total surplus dConsumer surplus exceeding producer surplus
What is a deadweight loss?Question 5Select one:a.The financial cost of a deep and long-lasting economic recessionb.The cost to a firm when the creation of new goods makes an old product obsoletec.When the costs of a firm are higher than the profitsd.A loss in social welfare
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