Consider a market for paper. Suppose demand (in metric tons) as a function of price (in...

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Consider a market for paper. Suppose demand (in metric tons) as a function of price (in pounds per metric ton) is given by = 8000-20P and that the marginal private cost of paper production is £250 per metric ton. Suppose further that noise is generated in the production of paper in direct proportion to the amount of paper produced. The estimated damage to the local community (as measured by their MWTP to eliminate the noise) is £100 per metric ton of paper produced. (a) 5 marks Find the level of paper production that maximizes total surplus in the paper market taken in isolation (ignoring the effects of noise pollution). Call this output level Q. (b) 5 marks Find the socially optimal (truly efficient) level of paper production (Q*), which maximizes total surplus after accounting for noise pollution. (c) 10 marks Suppose paper in this market is produced by perfectly competitive pro- ducers. What price will be charged (P) and how much paper will be produced (Qc)? How does the competitive output level Qe compare to the benchmark levels Q and Q*? Why? (d) 10 marks Now suppose paper in this market is produced by a monopolist. What price will be charged (Pm) and how much paper will be produced (Qm)? How does does the monopoly output level Qm compare to the benchmark levels Q and Q*? Why? (e) 10 marks Compute and compare the total surplus in the competitive equilibrium (part (c)) and in the monopoly equilibrium (part (d)). What can you conclude? (f) 10 marks Suppose the government wants to implement the socially optimal level of production in the perfectly competitive case by introducing a per-unit tax on paper production. Determine the level of tax, te (in pounds per metric ton) that achieves this goal. (g) 10 marks What would be the output level in the monopoly case if te, the same tax as in part (f), were imposed? Is this output level efficient? Why? Consider a market for paper. Suppose demand (in metric tons) as a function of price (in pounds per metric ton) is given by = 8000-20P and that the marginal private cost of paper production is £250 per metric ton. Suppose further that noise is generated in the production of paper in direct proportion to the amount of paper produced. The estimated damage to the local community (as measured by their MWTP to eliminate the noise) is £100 per metric ton of paper produced. (a) 5 marks Find the level of paper production that maximizes total surplus in the paper market taken in isolation (ignoring the effects of noise pollution). Call this output level Q. (b) 5 marks Find the socially optimal (truly efficient) level of paper production (Q*), which maximizes total surplus after accounting for noise pollution. (c) 10 marks Suppose paper in this market is produced by perfectly competitive pro- ducers. What price will be charged (P) and how much paper will be produced (Qc)? How does the competitive output level Qe compare to the benchmark levels Q and Q*? Why? (d) 10 marks Now suppose paper in this market is produced by a monopolist. What price will be charged (Pm) and how much paper will be produced (Qm)? How does does the monopoly output level Qm compare to the benchmark levels Q and Q*? Why? (e) 10 marks Compute and compare the total surplus in the competitive equilibrium (part (c)) and in the monopoly equilibrium (part (d)). What can you conclude? (f) 10 marks Suppose the government wants to implement the socially optimal level of production in the perfectly competitive case by introducing a per-unit tax on paper production. Determine the level of tax, te (in pounds per metric ton) that achieves this goal. (g) 10 marks What would be the output level in the monopoly case if te, the same tax as in part (f), were imposed? Is this output level efficient? Why?

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a The level of paper production that maximizes total surplus in the paper market taken in isolation is found by finding the maximum of the demand curve To do this set the derivative of Q with respect ... View the full answer