Economic assignment:

The residents of a small country town are worried about the environmental impact of the paper manufacturing plant located five kilometres away from the residential area. They do not want the factory closed because it employs 80% of the town's male population who are unskilled. The Local Council wants advice on how to keep the factoring operating with minimal negative environmental impact. As an economist working with the council, you have found that the inverse demand curve for paper is P = 200 - Q, the marginal private cost (unregulated competitive market supply) is MCp = 80 + Q, and the marginal harm from paper-dust (pollution) is MCd = Q. Provide a short report to the council by answering the following questions.

What is the unregulated competitive equilibrium?

What is the social optimum?

What specific tax (per unit output or paper-dust) results in the social optimum?

Suppose the paper producer becomes the sole supplier. What is the unregulated monopoly

equilibrium?

If the monopoly in part (d) decides to maximize total revenue, what would be the unregulated

monopoly equilibrium?

Given the insights gained from answers to parts a-e, advice the Local Council on how to keep the

paper factory running with sustainable social impact.