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3. Suppose the market for paper in the town of Athabasca has the following cost functions:

Demand = (P) =

250 - 3Q

Private MC = 35 +2Q


the marginal external cost associated with the paper production is given by the expression: MEC = 5 + Q

a.     If the above market is competitive, calculate the socially efficient levels of output and price.

b.     Now, if the firm is operating as a monopoly, calculate the level of output.

c.      Suppose the above factory has marginal social costs MSC = -3 + 8.5Q and abatement costs MCA = 20 - 0.5Q. If Athabasca wishes to set pollution standards for the paper factory, what daily level of pollution should be allowed?

d.     Now let's assume the town council favours an emissions tax for the factory. If a tax is implemented, at what level should the tax be set?

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