ECON 431 Midterm: ECON 431 Cal Poly SLO Midterm 2007Solutions
Document Summary
Question 1a. (15 points) externalities and monopoly markets. Demonstrate on a diagram that the deadweight loss from a negative production externality is larger under competition than under monopoly for sufficiently damaging pollutants. Carefully label the axes and all relevant variables. In the diagram, the private market equilibrium occurs where mpb = mpc (at quantity. Qc) in a competitive industry and where mr = mpc (at quantity qm) in a monopoly industry. The social optimum occurs where mpb = msc (at quantity q*) must involve smaller dwl (the red shaded triangle) than dwl in the competitive equilibrium (the cross-hatched triangle) whenever q* < qm < qc. If drawn (as above) such that q* < qm, the optimal policy for a monopoly market is a tax. If drawn such that qm < q*, the optimal policy for a monopoly market is a subsidy.
