Question

In: Economics

A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort...

A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations:
MCP = 5 + Q
MCS = 10 + 2Q
MB = 35 - 0.5Q
The marginal social cost at the competitive free-market equilibrium is

a) 5

b) 25

c) 20

d) 10

e) 50

Solutions

Expert Solution

Ans)- given,

Private marginal cost (MCP) = 5 +Q

Social marginal cost (MCS) = 10+2Q

Marginal benefits (MB) = 35 -0.5Q

Competitive free-market equilibrium condition-

Private marginal cost (MCP) = Marginal benefits (MB)

5 +Q = 35 – 0.5Q

Q +0.5Q = 35 – 5

1.5Q = 30

[Q = 30/1.5 = 20]

Hence, the free market equilibrium output is 20 units.

Now,

Put, Q = 20 in social marginal cost function

MCS = 10 +2*20 = 50

Hence, here option ‘e’ is correct. i.e. The marginal social cost at the competitive free-market equilibrium is 50.

Rahul Sunny answered 2 years ago
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