Amityville has a competitive chocolate industry with the (inverse) supply curve Ps = 440 + Q . While the market demand for chocolate is Pd = 1200 − Q , there are external benefits that the citizens of Amityville derive from having a chocolate odor wafting through town. The marginal external benefit schedule is MEB = 60 − 0.05Q .
a. Without government intervention, what would be the equilibrium amount of chocolate produced?
b. If the government of Amityville used a subsidy of $S per unit to encourage the optimal amount of chocolate production, what level should that subsidy be?