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QUESTION

# Already known: demand is given by p=42-5q Supply curve for trips: p=7+2qs market equilibrium: p=\$17 q=5 consumer surplus= 62.

Already known: demand is given by p=42-5q

Supply curve for trips: p=7+2qs

market equilibrium: p=\$17 q=5

consumer surplus= 62.5

producer surplus=25

It turns out that there is a negative externality associated with rafting trips on the Grand Canyon because each additional trip congests the river and reduces other users' enjoyment. The marginal damage of trips down the Grand Canyon is given by p = 3q.

a) Redraw the equilibrium from question 3b, adding the marginal damage function and the social marginal cost curve.

b) Indicate on the graph the efficient number of trips down the Grand Canyon.

c) Calculate the efficient number of trips.

d) Label the areas on your new graph either by shading or using letters. What areas correspond to consumer surplus, producer surplus, external damage, and the deadweight loss due to the externality at the initial equilibrium?

e) What areas correspond to consumer surplus and producer surplus at the efficient number of trips?