An externality example

Suppose demand for hogs is $Q_d = 300 - 2.5p$ and the private supply curve for hogs is $Q_s = -117+1.67p$. However, raising hogs has a negative externality in the form of unpleasant odors for downwind homes. This externality has a constant marginal cost of $5, in dollar terms.

  1. What is the price and quantity the market arrives at on it's own?
  2. What is the socially optimal quantity?
  3. What is the deadweight loss associated with the market operating on it's own?

Try this for yourself, then watch the following video for a walk-through.

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