Daily exercise 1 for 9/16

Suppose a good creates a positive externality and has the market WTP, market WTA and externality marginal benefit curves given below:

• `WTP=1000-2Q_M^D`
• `WTA=100+Q_M^S`

• `MB_e = 150`

Please determine the following:

1. The market P and Q before any policy is adopted to deal with the externality.

2. The efficient Q and the values of `P_2^d` and `P_2^s` that would be needed to achieve it.
3. The optimal subsidy rate `S`.

4. If you have time, also calculate the `\Delta CS` created by the subsidy.

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