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Author Question: Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + ... (Read 274 times)

MGLQZ

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Reply #10 on: Jun 18, 2019
Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MCe = Q. Is social welfare greater under monopoly or under competition?
Microeconomics ¦ Perloff ¦ 8th Edition
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moormoney

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Reply #11 on: Jun 18, 2019
First, the socially optimal quantity of paper is found by setting MCp + MCe = p or . Rearranging yields Q = 30. The competitive equilibrium is found by setting MCp = p or 10 + Q = 100 - Q. Rearranging yields Q = 45. The deadweight loss of those additional units equals (45 - 30) ∗ (70-40)/2 = 225. Under monopoly, the firm sets . The monopoly produces the socially optimal quantity, and therefore has no deadweight loss. Social welfare is greater under monopoly.


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