Question

J. Tu U Ces pront-maximizing price and quantly, what is the cas pronus Q9 Consider a regional market for paper with a large number of consumers and producers. We assum producers act as price-takers and have a constant marginal cost MC = 2. The aggregate demand paper is defined by: Qp = 10 - P For each unit of paper supplied, the nearby river is affected as the plants reject chemicals products. I total erternal cost to society is non-linear and increase as the river is saturated. Marginal external a is given by: MEC = 9 1. Find the price and quantity supplied at the equilibrium. 2. What are the socially optimal price and quantity? Illustrate the market for paper in a pri quantity graph and label the social equilibrium as well as the equilibrium found in the previ part. 3. Is the socially optimum price higher or lower? Why? Calculate the deadweight loss associated w the externality and add it to the graph. 4. What should be the level of the tax that ensures social optimum?

Answer 1

0 Q=10-P, MC=2, 1.) at Eqm P=MC, 10-Q=2. Q = 8 , p*=2. 2) at socially efficient Eqm PM B= SMC. SM C= PMCT MEC = 2+ q So at Eqm 10-Q=Q+Q 8=QQ, Qs 4 = 4. p*=2+4=6$ 3.) socially efficient price is higher than compt Eqm Level. buo 2 it in corporates the Mariginal external cost. deadwt loss DWL- ** (8-4) « (10-2) = $x 4x 8 = $ 16. 4.) tax= Eqm value of MP c at socially efficient eam t = Q = $4 Ans .

SMC Price PMB (4,6) socially efficient eqm PMC Quantity

SMC Price PMB (4,6) socially efficient eqm PMC Quantity