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Suppose the demand for paper is given by Qd = 360 – 4p and the industry...

Suppose the demand for paper is given by Qd = 360 – 4p and the industry marginal cost of production is given by Qs = 6p. In addition, the firm’s production imposes an externality with an associated marginal damage (MD) = 2.

(a) What is the private market equilibrium price and quantity? Hint: Solve for the inverse demand and supply first.

(b) What is the socially optimum equilibrium price and quantity?

(c) What is the net cost of society of producing at the private market equilibrium i.e. deadweight loss?

(d) Suppose the government wants to impose a tax T to correct the externality. What is the T needed to achieve social optimum?

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