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.
(c) Explain briefly why the answers you calculated in parts (a) and (b) differ.