In a market for dry cleaning, the inverse market demand function is given by and the (private) marginal cost of production for the aggregation of all dry-cleaning firms is given by. Finally, the pollution generated by the dry-cleaning process creates external damages given by the marginal external cost curve.
a. Calculate the output and price of dry cleaning if it is produced under competitive conditions without regulation.
b. Determine the socially efficient price and output of dry cleaning.
c. Determine the tax that would result in a competitive market producing the socially efficient output.
d. Calculate the output and price of dry cleaning if it is produced under monopolistic conditions without regulation.
e. Determine the tax that would result in a monopolistic market producing the socially efficient output.
f. Assuming that no attempt is made to monitor or regulate the pollution, which market structure yields higher social welfare? Discuss.