The production of lumber creates many externalities. Suppose that the perfectly competitive market supply and demand equations are respectively:

QS(P) = (5/4) P - 25

QD(P) = 225 - (5/4)P

Units are $/ log for prices and costs and logs for quantities.

* assume all benefits, costs and surplus and related efficiency concepts are measured using money which is not equity-weighted.

a) Find the inverse demand and inverse supply equations and plot on a graph (Fig. 1). b) Given your answers in a), write down equations for the following:

i) Consumers' maximum marginal willingness to pay (MWTP)

ii) Consumers' marginal benefit (MBConsumer)

iii) Producers' minimum marginal willingness to accept (MWTA) iv) Producers' marginal costs (MCProducer)

Label these on Fig. 1.

c) Set the marginal consumer benefit equal to the marginal producer cost to find the market equilibrium quantity and substitute back into either the inverse demand or supply equation to find the market equilibrium price. Show your work and label Pmarket and Qmarket on Fig. 1.

d) Add a legend to the graph and label the following.

i) total consumer benefits, costs, and, surplus.

ii) total producer, benefits, costs and surplus

v) total private surplus

vi) total consumer benefits NOT met by this market.

e) List two negative externalities due to deforestation for lumber. f) Suppose that the marginal external cost is: MCexternal = 20 + Q