Question

Computer paper is produced in a perfectly competitive, constant-cost industry. The production of paper also creates a great deal of pollution. The EPA (Environmental Protection Agency) is imposing regulations forcing paper mills to use a newly developed ionizer (which they can rent at a cost of $1 per ream of paper produced) to make their production processes more environmentally friendly.

              

               Assume before the EPA regulations go into effect, the industry is in long run equilibrium with

• 300 firms each producing 500 reams of paper per day
• the price of a ream of paper is $5.

Verbally and graphically explain what will happen to the market and each firm (P, Q, profit, # firms) in the short run and long run when the EPA regulations are put into affect. Make sure you include the long run market supply of paper on the graph.

Answer 1

When the new environment condition forces producers to take ionizer at the rent of $1 per ream of paper produced. The price of ream per paper is $5 which is the equilibrium price. If 300 firms are producing 500 ream of paper per day making 150000 units per day produced in an economy. When they can rent the ionizer at $1, it will raise the cost of the firm which will shift the supply curve to its left as they are less willing to supply the product at raised prices. When supply curve shifts from S0 to S1 in short run, prices rises by a little and quantity supplied ion the economy falls. When quantity supplied falls, people demand more of it and in long run demand rises which shifts demand curve to its right from D0 to D1 making output at the same level which was before and rising the price level for customers in the market.