Suppose an industry facing an inverse demand equation equal to P = 120 - 4Q faces a new pollution control law that shifts its constant marginal cost of production from C₁ = 50 to C₂ = 68.Compute the social costs of regulation in this industry.

Question

Quizplus · Accepted Answer

The Answer is The social cost will be equal to the changes in consumer and producer surplus resulting from the regulation.Before regulation,the market price will be $50 and output will be equal to 17.5 units.There is no producer surplus because the marginal cost is constant,but the consumer surplus is equal to the area of a triangle with height 70 and width 17.5 which is $612.50.After regulation,the market price will be $68 and the output will be 13 units.Again producer surplus is zero,but the consumer surplus is the area of triangle with height 52 and width 13 which is $338.The loss in consumer surplus resulting from the regulation is equal to $274.50 which is equal to the social cost of the pollution control law.

Suppose an Industry Facing an Inverse Demand Equation Equal to P