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A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS = 10 + 2Q, and MB = 35 - 0.5Q. A competitive free market will produce output of ____________ units, and this amount is __________ than the allocatively efficient level of output.

a) 15; more

b) 20; more

c) 25; more

d) 5; less

e) 10; less

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Related questions

John has a factory that produces paper and as a side product, some chemicals are thrown into the water: one unit of the pollutant per unit of paper. The marginal benefit to John of producing paper is given by MB = 10 - Q. The marginal cost is given by MC = 3 + Q. Amy's fishing decreases with pollution: for each unit of pollutant, her income decreases by $1.

a. What is the socially efficient quantity of paper to produce?
b. What quantity will be produced by John privately? What is the net social loss (deadweight loss) associated with this?
c. Suppose the government does not know John's marginal cost, what policy can it implement to make John produce the efficient amount?

Suppose you work as research economist at the EPA. There are two firms that operate in a perfectly competitive market. This implies that each has the same marginal benefit curve, which in this case is horizontal at MB = $100. Each of the firms, however, has a different marginal private cost schedule: MPC1= 20+Q and MPC2=30+2Q Each firm’s production process creates externalities that are valued by society at $10 per unit output. a) Show that without government intervention, the firms’ profit maximizing outputs are Q=80 for firm 1 and Q=35 for firm 2, and the market price is $100. b) Now calculate the socially optimal level of output for each firm. c) Your boss knows that the firms are currently producing too much output and simply decides that all firms should cut their output by 15%. Show that this is an inefficient solution to this externality problem.

1. suppose you work as a research economist at the EPA. Two firms operate in a perfectly competitive market. This implies that each has the same marginal benefit curve, which in this case is horizontal at MB= $100. Each of the firms, however, has a different marginal private cost schedule

MPC1=20+Q and MPC2=30+2Q

Each firm's production process creates externalities that are valued by society at $10 per unit output

a) show that without government intervention, the firms' profit-maximizing outputs are Q=80 for firm 1 and Q=35 for firm 2, and the market is $100

b) Now calculate that socially optimal level of output for each firm

c) your boss knows that the firms are currently producing too much output a simply decides that all firms should cut their output by 15%. Show that this is an inefficient solution to this externality problem

2. Suppose a new submarine for the Navy costs $10 billion. Half the population (130 million people) are willing to pay $100 each to have it, and the other half are willing to pay $30 each not to have it. Should it be built?

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