1. Suppose that the Big Paper Mill produces paper and discharges its dirty water into the Creek River. The following equations explain the demand and supply that the Big Paper Mill faces:
Demand Curve P = 120 – 2 Q
Supply Curve (Marginal Private Cost) P = Q
a. Carefully draw these two equations on the same graph.
b. Compute the equilibrium price and quantity for paper and label those points on your graph.
c. Calculate the consumer surplus and the producer surplus associated with the equilibrium quantity.
d. Big Paper Mill pollutes the waters of the Creek River, which kills the fish that people living downstream like to eat. If these social costs are added to BPM’s private costs, the marginal social cost schedule it faces is as follows:
MSC = 2 Q
Draw this equation into the graph from part (a) and calculate the socially efficient equilibrium quantity and price.
e. If production continues at the privately efficient level, what is the marginal cost to society? Label that point (e) on your graph. If production continues at the privately efficient level, show on your graph the deadweight loss to society and quantify that loss.