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Monash University

ECX5001

S2 2025

Homework 1

Due Date: Wednesday, 6 August by 11.55pm

1. The market for electricity in a particular region in Australia is characterized by the following

demand and supply curves:

=

100

10

=

20 +

2

where

is the quantity demanded of electricity in millions of kilowatt hours (kWh), is

the quantity supplied in millions of kWh, and

is the price of electricity in millions of dollars.

Currently there is no attempt to regulate the pollution generated by the power plants that

generate electricity. As a result, pollution is widespread. The marginal external cost (MEC)

associated with the production of electricity is given by the curve MEC = 4 .

(a)

On one graph, plot Supply (PMC), Demand (PMB), and SMC. Label everything

including axes.

(b) Calculate the output and price of electricity if it is produced if no attempt is made to

monitor or regulate the pollution, and label them

and .

(c) Calculate the socially optimal price and quantity, and label them and .

(d) In two sentences or less, explain why the answers in parts (b) and (c) differ. Use

economic theory as your reasoning, not simply mathematics.

(e) Determine the value of the consumer surplus, producer surplus and total external

costs from producing at . Add it together (or subtract as necessary) to get the

total economic surplus of the market equilibrium.

(f) Determine the total economic surplus at the socially optimal level of production

(g) What is the difference in total economic surplus (deadweight loss) between the

market equilibrium and socially optimal levels of production

2. Consider an economy with two participants, Anna and Ben.

(a) The market for pizza: Pizza is a private good (rival and excludable). Cara’s demand

for pizza is given by P=24-3Q and Dan’s demand for pizza is given by P=12-Q. The

supply (marginal cost) curve for pizza is given by P=6+2Q. Solve for the socially

optimal quantity of pizza. Will the market (without intervention) lead to the socially

optimal quantity of pizza

(b) The market for parks: parks are a public good (non-rival and non-excludable). Clara’s

demand for parks is given by P=24-3Q and Dan’s demand for parks is given by P=12- Q. The supply (marginal cost) curve for parks is given by P=6+2Q. Solve for the

socially optimal quantity of parks. Will the market (without intervention) lead to the

socially optimal quantity of parks

3. In the model of public goods introduced in the “Economic Concepts” slides, we found that

an individual’s best-response private contribution () decreased as everybody else’s

contribution ( ) increased. On a new graph, modify the model (graphically) and draw a set

of indifference curves such that an individual’s best-response private contribution ()

increases as everybody else’s contribution ( ) increases. Are these indifference curve

plausible What do these indifference curves say about the preferences of individuals in the

model