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Regulation under a monopoly:

The inverse demand for a product is P(Q) = 100 - (1/2)Q. Production is associated with a marginal private cost, MCP(Q) = Q, and a constant marginal external cost, MCE = 25.

(a) Graph inverse demand, marginal revenue, marginal private cost, and marginal social cost on a single graph. Label the axes.

(b) What is the unregulated equilibrium? (Define in terms of price and quantity.)

(c) What is the socially optimal price-quantity pair?

(d) What is the deadweight loss under an unregulated monopoly in this case?

(e) What should the regulator do?

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019

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Related questions

You have been hired by the town of Bedford, Ohio, to conduct an analysis of ongoing operations by a local Coca Cola bottler. A study by the Ohio Environmental Protection Agency found that this firms water pollution is negatively affecting the environment. The study has been read by several politicians and they have requested the state government to impose a tax. Politicians expect to observe a decrease in environmental damage (specifically, eliminate the deadweight loss).

Your task is to find the optimal tax that the government should impose to this Coca Cola bottler. To help you in your task, you are given the following information:

Inverse Demand: P=10- Q

Inverse Supply (Marginal Private Cost): MCp = 5+Q

Externality Cost (Marginal Cost of Externality): MCE = 0.5Q

a. Find the equilibrium market price and quantity (Pm, Qm)

b. Find the socially optimal equilibrium price and quantity ( P*, Q *)

c. Determine the optimal tax (the Green Tax) the state government should charge the local Coca Cola bottler to deal with the negative externality. Hint: To find this, measure the difference between the socially optimal equilibrium price (P*) and the price the firm receives at the socially optimal equilibrium quantity (Q*), that is, MCp (Q=Q*)

A monopolist faces an inverse market demand P(Q) = 200 - (1/2)Q and a marginal cost of MC(Q) = 20 + Q.

(a) What is the unregulated monopolist's optimal quantity?

(b) What would an appropriate regulatory instrument to bring this market back to efficiency?

(c) What would be the regulated quantity and price if this instrument were successfully implemented?

(d) What is the increase in welfare resulting from regulation?

1. A monopolist faces an inverse market demand P(Q) = 200 - 1 - 2Q and a marginal cost of MC(Q) = 20 + Q.

(a) What is the unregulated monopolist's optimal quantity?

(b) What would an appropriate regulatory instrument to bring this market back to efficiency?

(c) What would be the regulated quantity and price if this instrument were successfully implemented?

(d) What is the increase in welfare resulting from regulation?

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