You are an industry analyst that specializes in an industry

You are an industry analyst that specializes in an industry where the market inverse demand is P = 250 - 4Q. The external marginal cost of producing the product is MCExternal = 7Q, and the internal cost is MCInternal = 13Q. Instructions: Enter your responses rounded to the nearest two decimal places. a. What is the socially efficient level of output? units b. Given these costs and market demand, how much output would a competitive industry produce? units c. Given these costs and market demand, how much output would a monopolist produce? units d. Which of the following are actions the government could take to induce firms in this industry to produce the socially efficient level of output. Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click twice to empty the box. Pollution taxes unanswered Nonrival consumption unanswered Pollution permits unanswered

Solution

Marginal social cost (MSC) = MC_External + MC_Internal = 7Q + 13Q = 20Q

(a) Output is scially efficient when P = MSC.

250 - 4Q = 20Q

24Q = 250

Q = 10.42

(b) A competitive firm will equate Price with MC_Internal.

250 - 4Q = 13Q

17Q = 250

Q = 14.71

(c) A monopolist will equate marginal revenue (MR) with MC_Internal.

Total revenue (TR) = P x Q = 250Q - 4Q²

MR = dTR/dQ = 250 - 8Q

Euating MR and MC_Internal,

250 - 8Q = 13Q

21Q = 250

Q = 11.90

(d) Since there is an external cost, there is negative externality which government can correct using

- Pollution taxes

- Pollution permits