Question

The market for paper in a particular region has the supply and demand curves:

            QD = 160,000 - 2,000P          QS = 40,000 + 2,000P,                     

where Q is measured in hundred-pound lots, and P is price per hundred-pound lot. There is currently no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost associated with the paper production is given by the expression:         

            MEC = 0.0002Q.

a.   Calculate the competitive price and output, assuming that no attempt is made to monitor or regulate the dumping of effluent.

b.   Determine the socially optimal levels for price and output. If your answers in (a) and (b) are different, explain the source of the difference.

c.   Sketch a diagram showing the costs or benefits to society of allowing the market to operate in an unregulated fashion.

Answer 1