Question

Suppose the demand for paper is given by P = 600 – 6Q. The firms who produce paper have marginal private cost of MPC = 60 + 1.5Q. Production of this good results in water pollution and the negative effects of the water pollution are measured by the marginal external cost MEC = 2.5Q.

(a) In the private market equilibrium, paper will sell for $____ and the private equilibrium quantity will be _____ .

(b) In the social equilibrium, paper will sell for $____ and the social equilibrium quantity will be _____.

(c) At the PRIVATE equilibrium the difference between the price consumers are willing to pay and the price sellers are willing to sell for (WTP – WTS) is equal to $______ and the marginal external cost (MEC) is equal to $_____ .

(d) At the SOCIAL equilibrium the difference between the price consumers are willing to pay and the price sellers are willing to sell for (WTP – WTS) is equal to $_____ and the marginal external cost (MEC) is equal to $______ .

Answer 1

A) Private equilibrium at

P= marginal private cost( MPC)

600-6q=60+1.5q

540=7.5q

Q=540/7.5=72

P=600-6*72=600-432=168

B) marginal social cost = MPC+ MEC=60+1.5q+2.5q=60+4Q

Social efficient equilibrium at ,

P= MSC

600-6q=60+4q

Q=540/10=54

P=600-6*54=600-324=276

C)WTP by CONSUMER is nothing but price of demand

WTP=600-6q

And WTS by seller is nothing by MPC .

Difference of WTP and WTS

WTP-WTS=600-6q-(60+1.5q)

WTP-WTS=540-7.5q

At private equilibrium,WTP-WTS=540-7.5*72=540-540=0

Marginal External cost=2.5*72=180

D) At social efficient equilibrium,

WTP-WTS=540-7.5*54=540-405=135

Marginal External cost=2.5*54=135