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In a market for dry cleaning, the inverse market demand function is given by P=100-Q and the (private) marginal cost of production of all dry cleaning firms is MC=10+Q
In a market for dry cleaning, the inverse market demand function is given by P=100-Q and the (private) marginal cost of production of all dry cleaning firms is MC=10+Q. Finally, the pollution generated by the dry cleaning process creates external damages given by the marginal external cost curve MEC=Q
(a) Calculate the output and price of dry cleaning if it is produced under competitive conditions without regulation
(B) determine the socially efficient (optimal) price and output of dry cleaning
(C) If your answers in (a) and (B) are different, explain the source of the difference in not more than three sentences
(D) calculate the cost to society of allowing the dry cleaning market to operate unregulated
Expert Solution
A) in private market eqm
P = MC
100-Q= 10+Q
90= 2Q
Q*= 45
P*= 100-45= 55
B) at socially effecient eqm
P= MSC
MSC = MC + MEC
= 10+Q+Q
= 10+2Q
At eqm, 100-Q= 10+2Q
90= 3Q
Q"= 30
C) yes, the private eqm & socially optimal level of output levels are different
Bcoz in case of negative externality, when the negative effect of an activity is not taken into account, then the private market tends to overproduce the good ,
Thus Socially effecient level is always less than private market eqm level
D) cost to society is Deadweight loss
= .5*(Q*-Q")*((SMC(at Q*) - PMC(Q*))
= .5*(45-30)*(10+2*45 - 10- 45)
= .5*15 *(45)
= 337.5
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