What is the private equilibrium price and quantity of shale

Reference no: EM13185908

Suppose that the inverse demand for shale gas is given by p = 400 - 2q. The private marginal cost of producing shale gas is PMC = 100 + q. Suppose that in order to produce shale gas at the PMC given above, the oil and gas (O&G) companies (that produce the gas) must transport drilling equipment and millions of gallons of water to and from the shale gas well. Suppose that visual disamenities, air pollution, and noise pollution impose costs of (1/10)q on each of 20 households near the well.

Now suppose the households decide to buy the local O&G that is causing the pollution.

They are the only owners of the firm. Now what is the private equilibrium price and quantity of shale gas production. How does this equilibrium compare to the socially optimal price and quantity?

Reference no: EM13185908

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