Question

The paper industry is the major industrial source of water pollution. The inverse demand curve for the paper market (which is also the marginal benefit curve) is P = 450 - 2Q where Q is the quantity consumed when the price consumers pay is P. The inverse supply curve (also the marginal private cost curve) for refining is MPC = 30 + 2Q. The marginal external cost is MEC = Q where MEC is the marginal external cost when the industry releases Q units of waste.

a) Sketch the graphs for marginal benefit, the marginal private cost, the marginal external cost and the marginal social cost.

b) What are the equilibrium price and quantity for the paper industry when there is no correction for the externality?

c) What is socially optimal level of output and price?

d) How large is the deadweight loss for the externality? Indicate the deadweight loss on your diagram.

Answer 1