the deadweight loss from pulp The graph ilistrates the unrep

The graph ilistrates the unrepetuted market for pulp and paper.

Solution

If nobody owns the river, equilibrium is obtained by equating D (marginal benefit, MB) with S (marginal private cost, MPC).

Equilibrium quantity = 180 tons (at $360 per ton).

But social optimum is attained by equating MB with marginal social cost (MSC). Since MSC is 3 times the MPC, the supply curve S shifts leftward with vertical intercept starting from $180.

Socially optimum equilibrium output will be 150 tons at $420 per ton.

Deadweight loss = (1/2) x difference in price x difference in quantity

= (1/2) x $(420 - 360) x (180 - 150) = (1/2) x $60 x 30 = $900