4. The market for paper in a particular region in the U.S. is characterized by the following demand and supply functions:
P = 80 - 0.0005 QD P = -20 + 0.0005 QS
where QD is the quantity demanded of paper in 100 pound (lb.) lots, QS is the quantity supplied of paper in 100 pound (lb.) lots, and P is the price per 100 lb. lot of paper. 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"
MEC = 0.0006 QS
(a) Calculate the output and price of paper if it is produced under competitive conditions and no attempt is made to monitor or regulate the dumping of effluent. Graph this situation and label all functions and axes on the top of the next page. Briefly explain your answer.
(b) Determine the socially efficient price and output of paper below, and then add this result to your graph above. Be sure to label your work completely.
(c) Explain clearly and thoroughly why the answers you calculated in parts (a) and (b) differ.
The solution answers the question below.