Determine the socially efficient price and output of paper

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Reference no: EM131000964

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

QD =160,000−2,000P and QS =−40,000+2,000P,

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 con- ditions and no attempt is made to monitor or regulate the dumping of effluent.

(b) Determine the socially efficient price and output of paper.

Reference no: EM131000964

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