In the following, use the model in Exercise 3.7.
Refer to Exercise 3.7,
Suppose that the inverse demand curve for paper is ( = 200 - Q, the private marginal cost (unregulated competitive market supply) is MC( = 80 + Q, and the marginal harm from gunk is MCg = Q.
a. What is the unregulated monopoly equilibrium?
b. How could you optimally regulate the monopoly? What is the resulting (socially optimal) equilibrium?