The demand for fabric is Q = 40 - P/2. The private cost of producing fabric...

The demand for fabric is Q = 40 - P/2. The private cost of producing fabric is C(Q) = Q2, with private marginal cost PMC = 2Q. Washing and dyeing fabric causes water pollution with total damages CE(Q) = Q2/2, so external marginal costs of EMC = Q.

Calculate the net benefits under competitive equilibrium and under efficient equilibrium, as well as the DWL. What can you conclude from the value of DWL (which equilibrium is the right level or production)?

Expert Solution

Deadweight loss under competitive equilibrium is 40

There is a deadweight loss under competitive equilibrium. So, we can conclude that efficient equilibrium is the right level of production.

We can also conclude that the efficient equilibrium is the right level by looking at the net benefit in each type.

In competitive equilibrium, the net benefit is 600 whereas in efficient equilibrium, the net benefit is 640. Therefore, the right level is efficient equilibrium.

Rahul Sunny answered 8 months ago

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