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In Paris, hundreds of small bakeries produce bread for sale to their customers at a...

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Accounting

In Paris, hundreds of small bakeries produce bread for sale to their customers at a marginal cost of MC= 2 + 0.1Q. The inverse demand for bread is given by P = 10 ? 0.1Q, where P is in euros per loaf and Q is loaves per hour. The baking of bread also creates a positive externality: there is nothing quite like the smell of fresh-baked bread. Tourists and residents receive external marginal benefits given by EMB = 2 ? 0.02Q. To achieve the socially optimal output, government can use a price-based intervention; in this case, a subsidy. How large should the ideal subsidy be to move the market to the socially optimal level?

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