Suppose the market for dry cleaning has an inverse demand of P = 12 - 0.10Q and an inverse supply curve (MC) of P = 0.10Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is 80 cents. To correct the market inefficiency, the government could set a quota on the number of laundered pieces of clothing equal to:

Question

Quizplus · Accepted Answer

The socially optimal quantity is where the social marginal cost (private marginal cost plus external marginal cost) equals the demand. The social marginal cost is P = 0.10Q + 0.80. Setting this equal to the demand curve: 12 - 0.10Q = 0.10Q + 0.80, solving gives Q = 56.

Suppose the Market for Dry Cleaning Has an Inverse Demand