Analyzing Equilibrium And Socially Optimal Price And Quantity In The Presence Of Externalities

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Analyzing Equilibrium and Socially Optimal Price and Quantity in the Presenceof ExternalitiesConsider the perfectly competitive market for a special type of computer memory chip, where thedemand and supply functions are given as Qd = 7,000–5P and Qs =-2,000 + 10P, respectively, andeach unit of production generates a pollution cost of 10 cents.1.Calculate the equilibrium price and quantity in the market without considering theexternality.2.Determine the socially optimal price and quantity by accounting for the externality.3.Provide a diagram illustrating the equilibrium price and quantity, along with the sociallyoptimal price and quantity. In your diagram, label the market demand curve, market supplycurve, equilibrium price and quantity, and the socially optimal price and quantity.4.Explain the implications of the pollution cost for the market and the rationale behind thesocially optimal price and quantity.(Word count: 800-1000 words)

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