In the market for paper in a particular region, the inverse market demand functi

Question

In the market for paper in a particular region, the inverse market demand function (i.e. the private marginal benefit) is given by P 80-0.0005Q and the (private) marginal cost of production for the aggregation of all paper producers is given by MPC 0.0005Q +20, where Q is the output of paper. There is currently no attempt to regulate the discharge of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost associated with the paper production is given by the expression: MD 0.0002Q. 4. In the absence of any regulation, how much paper is produced? a) 20,000. 50,000 600, ) 60,000 160,000 e) None of the above. What is the locy eildentlevel of production of paper? efficientlevel of production of paper? a) 20,000. b) 50,000. c) 60,000. d) 160,000. e) None of the above. 6. What level o Pigouvian subsidy fwould lead to the efficient level of output being produced? a) $10. b) $12. c) $50 d) $55. e) None of the above. 7. What is the total amount of the [subsidy paid/to the firms? a) $50,000 b) $100,000. c) $500,000. d) $600,000. e) None of the above.

Explanation / Answer

Question 4

Private marginal benefit function is as follows -

P = 80 - 0.0005Q

Private marginal cost function is as follows -

MPC = 0.0005Q + 20

In the absence of any regulation, market will produce that much quantity corresponding to which private marginal benefit equals the private marginal cost.

Equating MPB and MPC,

80 - 0.0005Q = 0.0005Q + 20

0.0010Q = 60

Q = 60/0.0010 = 60,000

So, in the absence of any regulation, 60,000 units of paper is produced.

Hence, the correct answer is the option (c).

Question 5

MPC = 0.0005Q + 20

MD = 0.0002Q

Calculate the social marginal cost -

MSC = MPC + MD = 0.0005Q + 20 + 0.0007Q = 0.0012Q + 20

Socially efficient level of production of paper is that level of output corresponding to which MSC equals MPB.

Equating MPB and MSC,

80 - 0.0005Q = 0.0007Q + 20

0.0012Q = 60

Q = 60/0.0012 = 50,000

The socially efficient level of production of paper is 50,000 units.

Hence, the correct answer is the option (b).

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