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Chapter 18: Problem 6

The market for paper in a particular region in the United States is characterized by the following demand and supply curves: \\[Q_{D}=160,000-2000 P \quad \text { and } \quad Q_{S}=40,000+2000 P\\] where \(Q_{D}\) is the quantity demanded in 100 -pound lots, \(Q_{S}\) is the quantity supplied in 100 -pound lots, and \(P\) is the price per 100 -pound lot. Currently there is 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 (MEC) associated with the production of paper is given by the curve \(\mathrm{MEC}=0.0006 \mathrm{Q}_{\mathrm{S}}.\) a. Calculate the output and price of paper if it is produced under competitive conditions and no attempt is made to monitor or regulate the dumping of effluent. b. Determine the socially efficient price and output of paper. c. Explain why the answers you calculated in parts (a) and (b) differ.

Short Answer

Expert verified
The competitive market doesn't take into account the external cost of pollution, thus the price will be lower and quantity higher than in a socially efficient scenario, wherein these costs are taken into account.

Step by step solution

01

Calculate the Output and Price under Competitive Conditions

To find the equilibrium under competitive conditions (no regulation), equate the quantity demanded (\(Q_{D}\)) to the quantity supplied (\(Q_{S}\)). \n\nThus, \(160,000-2000P = 40,000+2000P\). Solving for P (price) and then substituting the price to either of the equations to get the equilibrium quantity.
02

Calculate the Socially Efficient Price and Output

To find the socially efficient price and output, consider the marginal external cost (MEC). The socially efficient level of output is found where the quantity demanded is equal to the quantity supplied, plus the marginal external cost (MEC).\n\n Therefore, set \(Q_D = Q_S + MEC\). \n\nSubstitute \(Q_S\) and \(MEC\) with their equivalent expressions in terms of \(Q\) and solve for \(Q\) and \(P\).
03

Comparison of Competitive vs Socially Efficient Outcomes

From step 1 and 2, we will have two sets of price and quantity values. Explain the difference in outcomes due to the existence of the external costs in production that were not taken into account in the competitive equilibrium situation.

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