Suppose that the inverse demand curve for paper P = 218 – Q, the private

marginal cost is MCp = 92 + Q and the marginal harm from gunk is MCg = Q.

-What is the unregulated competitive equilibrium price and quantity? Let this equilibrium be E1 .
-What is the socially optimum price and quantity? Let this equilibrium be E2.
-In a clearly labeled graph, plot demand, private marginal cost, social marginal cost and marginal harm from gunk, and E1 and E1.
-Show in the previous graph and calculate the DWL from externalities.
-What tax would result in the social optimum?
-Illustrate your answer in part 5) with a new graph.
-With the tax, what is the DWL and how does it compare to the DWL in 4)?

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