Determine the socially efficient price and output of paper

Reference no: EM13902803

The market for paper in a particular region in the United States is characterized by the following demand and supply curves:

QD = 160,000 - 2000P and QS = 40,000 + 2000P

where QD is the quantity demanded in 100-pound lots, QS 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 MEC = 0.0006QS.

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 dump- ing 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.

Reference no: EM13902803

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