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You are an industry analyst that specializes in an industry where the market inverse demand is...

You are an industry analyst that specializes in an industry where the market inverse demand is P = 300 - 3Q. The external marginal cost of producing the product is MCExternal = 9Q, and the internal cost is MCInternal = 15Q.


a. What is the socially efficient level of output?

Unit (10 is wrong)


b. Given these costs and market demand, how much output would a competitive industry produce?


Unit

c. Given these costs and market demand, how much output would a monopolist produce?

Unit

d. Which of the following are actions the government could take to induce firms in this industry to produce the socially efficient level of output.

Pollution taxeschecked

Pollution permitschecked

Nonrival consumption

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Homework Answers

Answer #1

(a) Social marginal cost (SMC) = MC(Internal) + MC(External) = 15Q + 9Q = 24Q

Social efficiency is achieved by equating demand with SMC.

300 - 3Q = 24Q

27Q = 300

Q = 11.11 ~ 11

(b) A competitive industry will equate demand with MC(Internal).

300 - 3Q = 15Q

18Q = 300

Q = 16.67 ~ 17

(c) A monopolist will equate Marginal revenue (MR) with MC(Internal).

P = 300 - 3Q

Total revenue (TR) = P x Q = 300Q - 3Q2

MR = dTR/dQ = 300 - 6Q

Equating with MC(Internal),

300 - 6Q = 15Q

21Q = 300

Q = 14.29 ~ 14

(d) Pollution tax and pollution permits are the two actions taken by government in presence of external cost.

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