Pollution and Monopolies: In Chapter 21, we discussed the externality from pollution-producing industries within a competitive market.
A: Suppose now that the polluting firm is a monopolist.
(a) Begin by illustrating a linear (downward sloping) demand curve and an upward sloping MC curve for the monopolist. Indicate the efficient level of production in the absence of any externalities.
(b) Draw the marginal revenue curve and illustrate the monopolist’s profit maximizing “supply point”.
(c) Suppose that the monopolist pollutes in the process of producing, with the social marginal cost curve SMC therefore lying above the monopolist’s marginal cost curve. Does this change anything in terms of the monopolist’s profit maximizing decision?
(d) Illustrate a SMC curve with sufficient pollution costs such that the monopoly’s output choice becomes efficient.
(e) True or False: In the presence of negative production externalities, the per-unit tax that would cause the monopolist to behave efficiently might be positive or negative (i.e. it might take the form of a tax or a subsidy).
(f) Suppose that the production externality were positive instead of negative. True or False: In this case, the monopolist’s output level will be inefficiently low.
B: Suppose a monopolist faces the cost function c(x) = βx2, but production of each unit of x causes pollution damage B.
(a) What is the marginal cost function for the monopolist? What is the social marginal cost function?
(b) Suppose demand curve is equal to p(x) = A −ax. Determine the monopolist’s output level xM (assuming no price discrimination).
(c) What is the monopoly price?
(d) For what level of B is the monopolist’s output choice efficient?