NEGATIVE EXTERNALITY CASE:

Given:

In the competitive market: inverse demand function: P(Q) = 100 - Q.

Now, the negative externality involves, we have:

Supply Curve by private marginal cost: Supply = MCp = 10 + 2Q. (Hint: This function will not count towards negative externality.

Total Cost of externality: Ce (Q) = (1/2)*Q^2.

We use the PARTIAL EQUILIBRIUM MARKET FRAMEWORK in this problem. (Hint: (a) supply curve is defined by marginal cost (b)marginal cost of externality is in the marginal social cost):

MCe = Q ;

MCs = MCp + MCe;

MCs = 10 + 3Q

Solve the following questions:

a. competitive equilibrium.

b. difference in deadweight loss between the social optimum and competitive equilibrium.

c. What will the social optimum be if under UNIT TAX.

d. A MONOPOLY enters the market. Marginal cost is the same as MCp = 10 + 2Q. Find the equilibrium quantity and price under MONOPOLY.

e. Compare the DWL under both cases (competitive and monopoly) under the negative externality.

f. We know use the TAX from part (c) to the Monopoly part (d). Solve the quantity, price and deadweight loss.