Suppose that the inverse demand curve for paper is p = 200 - Q, the private marginal

Question:

Suppose that the inverse demand curve for paper is p = 200 - Q, the private marginal cost (unregulated competitive market supply) is MCp = 80 + Q, and the marginal harm from gunk is MCg = Q.

a. What is the unregulated competitive equilibrium?

b. What is the social optimum?

c. What specific tax (per unit of output of gunk)

results in the social optimum? (Hint: See Solved Problem 17.1.) M

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