The market for paper in one region of the US is characterized by the following demand and supply curves:
Qd=160000-2000P Qs=40000+2000P (Q is 100-pound lots)
The marginal external cost of the effluent being dumped into the local streams and rivers by the paper mills=0.0006Qs.
a. Find the price and output of paper if the government makes no attempt to limit the dumping of effluent.
b. Find the socially optimal price and output of paper.
c. Why don't firms behave as described in your answer to part b (produce at this level and charge this price)?
d. How could policy makers achieve this price and output level?
e. What would be the deadweight gain or loss from moving from the outcome in part a to the outcome in part b?
f. If consumers become more price sensitive, how would this affect your answer to part e?