Question

The Onondaga County Resource Recovery (OCRRA) system assumed responsibility for solid waste management on November 1, 1990, for thirty-three of the thirty-five municipalities in Onondaga County, New York. OCRRA is a non-profit public benefit corporation similar to the New York State Thruway Authority. It is not an arm of county government. Its Board of Directors is comprised of volunteers who develop programs and policies for the management of solid waste. The OCRRA Board is responsible for adopting a budget that ensures there will be sufficient revenues to cover expenditures. It does not rely on county taxes. OCRRA has implemented an aggressive series of programs promoting waste reduction and recycling where markets exist to create new products. While a number of communities struggle to surpass the 20% recycling mark, Onondaga County's households and commercial outlets currently recycle more than 67% of the waste that once was buried in landfills. Converting non-recyclable waste into energy (electricity) is also a top priority. To show the deadweight loss from monopoly problem, assume that monthly OCRRA’s market supply and demand conditions are: QS Q D = 2,000,000 + 10,000P = 1,750,000 5,000P (Market Supply) (Market Demand) where Q is the number of customers served, and P is the market price of annual trash hauling and recycling service. A. Graph and calculate the equilibrium price/output solution. How much consumer surplus, producer surplus, and social welfare are produced at this activity level? B. Use the graph to help you determine the deadweight loss for consumers and the producer if the market is run by unregulated profit-maximizing monopoly. (Note: If monopoly market demand is P = $350 - $0.0002Q, then the monopolist’s MR = $350 - $0.0004Q.

Answer 1

(a) The market demand and market supply curves are equated to calculate the competitive market equilibrium price. It is as shown below:

The market demand and market supply curves are equated to calculate the competitive market equilibrium output. It is as shown below:

The value of consumer surplus is equal to the region under the market demand curve that lies above the market equilibrium price of $250. Because the area of such a triangle is one-half the value of the base times the height, the value of consumer surplus equals:

The value of producer surplus is equal to the region above the market supply curve at the market equilibrium price of $250.

Social welfare is the addition of consumer and producer surplus. It is shown below:

This is shown diagrammatically below:

The total of yellow and blue shaded area represents the social welfare.

Step 8 of 12

(b) To calculate the optimum price output level MR=MC=Market supply.

At this output level price will be:

Under monopoly, the amount supplied falls to 300,000 and the market price rises to $290 per year for trash hauling and recycling service. Thus the consumer dead weight loss is determined as:

The amount of deadweight loss from monopoly suffered by producers is determined as:

Total dead weight loss is determined as:

This is shown diagrammatically below:

The yellow shaded area represents the consumer loss and the blue shaded area represents the producer loss. The total of both the area is the deadweight loss.