A local paper factory has the following supply and demand. Answer the following
ID: 1158234 • Letter: A
Question
A local paper factory has the following supply and demand. Answer the following question using the information from the table below.
Price
Quantity Demanded
Quantity Supplied without paying cost of pollution (firm's private cost)
Quantity Supplied after paying cost of pollution (true social cost)
$40
120
85
60
$50
110
110
80
$60
100
125
100
$70
90
170
120
$80
80
200
140
What is the equilibrium price and quantity when the supplier is not paying the cost of pollution?
What is the equilibrium price and quantity when the supplier is paying the cost of pollution?
What is the overall effect in this problem when the supplier absorbs the negative externality? That is, what is the difference in price and quantity?
Price
Quantity Demanded
Quantity Supplied without paying cost of pollution (firm's private cost)
Quantity Supplied after paying cost of pollution (true social cost)
$40
120
85
60
$50
110
110
80
$60
100
125
100
$70
90
170
120
$80
80
200
140
Explanation / Answer
(1) When supplier is not paying cost of pollution, Quantity demanded = Quantity supplied = 110 (equilibrium quantity) with equilibrium price of $50.
(2) When supplier is paying cost of pollution, Quantity demanded = Quantity supplied = 100 (equilibrium quantity) with equilibrium price of $60.
(3)
Increase in price = $60 - $50 = $10
Decrease in quantity = 110 - 100 = 10
Deadweight loss = (1/2) x Increase in price x Decrease in quantity = (1/2) x $10 x 10 = $50
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