1.The Johnsville Co. produces pipe insulation at a cost of $10 per ton. It is al
ID: 1124259 • Letter: 1
Question
1.The Johnsville Co. produces pipe insulation at a cost of $10 per ton. It is also known that for every ton of insulation it produces it also vents into the air one ounce of asbestos fibers, which are a very hazardous substance. Johnsville could contain these fibers at a cost of $4 per ounce. The demand for pipe insulation is given by: Q 2640 120 P and Johnsville is the sole producer (a) In the absence of any regulation, how much insulation would Johnsville produce, and how much profit would it make, if it sought to maximize profits? (b) Suppose the pipe insulation industry were perfectly competitive, with every firm able to manufacture pipe insulation at a cost of $10 per ton. What would be the level of production now? (c) What is the socially efficient level of production of pipe insulation, assuming that the damage caused by the asbestos fibers is greater than the $4 cost of abatement? Under this assumption can you say which situation (monopoly or competition) is better from the social point of view? (Hint: Set the external damage caused by an ounce of asbestos fibers to x, then calculate the difference in deadweight loss between the monopoly and the competitive solutions, as a function of x.)Explanation / Answer
P
Q
PC
TR
Profit
0
2640
26400
0
-26400
2
2400
24000
4800
-19200
4
2160
21600
8640
-12960
6
1920
19200
11520
-7680
8
1680
16800
13440
-3360
10
1440
14400
14400
0
12
1200
12000
14400
2400
14
960
9600
13440
3840
16
720
7200
11520
4320
18
480
4800
8640
3840
20
240
2400
4800
2400
22
0
0
0
0
a. In the absence of any regulation, it will produce 720 at P =16 with profit of 4320
b. Under perfectly competitive firm, it will produce at a point where MC=MR, Q=1440
c. The socially efficient level of production is the level which includes the private cost and externality. So the socially efficient level would be at price = $10+$4 per ounce
Here perfect competition would be better as the deadweight loss would be more at monopoly
Perfect competition, Surplus or Total revenue = 10* 1440 = 14400
Monopoly competition, Surplus or Total revenue = 16* 720 = 11520
Loss = 14400-11520 = 2880
P
Q
PC
TR
Profit
0
2640
26400
0
-26400
2
2400
24000
4800
-19200
4
2160
21600
8640
-12960
6
1920
19200
11520
-7680
8
1680
16800
13440
-3360
10
1440
14400
14400
0
12
1200
12000
14400
2400
14
960
9600
13440
3840
16
720
7200
11520
4320
18
480
4800
8640
3840
20
240
2400
4800
2400
22
0
0
0
0
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