A textile mill releases pollution into nearby wetlands, and the associated health and ecological damages are not considered in the private market. Suppose you observe the following market structure:
MPB= 800- .5Q MPC= 20+ .3Q
MEB = 0 MEC= .4Q
A. Find the competitive equilibrium, Qc and Pc, and the efficient equilibrium, Qe and Pe.
B. Graph these curves and clearly mark the differences between these two equilibriums. You do not need to worry about scale or accurately depicting their slopes relativ to each other, your graph just needs to be qualitatively correct.
C. What is the level of deadweight loss at the competitive outcome, relative to the efficient outcome?
D. Suppose the textile mill owned the rights to the wetlands, and it is negotiating with a private environment groups that is willing to pay the mill to produce less output. For the 800th unit of output, determine the range within which a payment would be acceptable to both parties.
E. At an output of 800 units, what is the cumulative external cost of production?