Answer to Question #146503 in Microeconomics for SMIT

Question

What is the equilibrium price and quantity of output in the market and why? Which price and quantity combination represents the social optimum and why? How can the government intervene to shift the market from the equilibrium outcome to the socially-optimal outcome?

Answer 1

The equilibrium price and quantity of output in the market can be find in the point where demand and supply curves intersect, so Qd = Qs. If some kind of externality exost, then the market price and quantity combination doesn't represents the social optimum.

The government can set some production quota, pigovian tax or require to buy permits for pollution to shift the market from the equilibrium outcome to the socially-optimal outcome.