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Assume that notebook paper is sold in a perfectly competitive industry. The industry short-run supply curve (or marginal cost curve) is *P = MC = 2Q*, where *Q* is measured in millions of reams per year. The inverse demand for notebook paper is *P = 40 – 8Q*.

**a. Find the equilibrium market price and quantity sold.**

**
The equilibrium quantity is **
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** million reams.**

**
The equilibrium price is $ **
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** .**

The equilibrium quantity can be found by setting (inverse) supply equal to (inverse) demand: *2Q = 40 – 8Q*. Solving for *Q* yields *Q = 4*; plugging that quantity, 4, back into either demand or supply yields *P = $8*. For further review see section “Market Equilibrium” and section “Externalities”.

**
Suppose that, in their production processes, paper manufacturers have been dumping waste in nearby streams. The external marginal cost is estimated to be $0.50 for each ream produced.
**

**b. Calculate the socially optimal level of output and price for the paper industry. **

**
The socially optimal quantity is **
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** million reams.**

** The socially optimal price is $ **
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The socially optimal quantity can be found by equating social marginal cost (including both private and external cost) to (inverse) demand: *2Q + 0.50 = 40 – 8Q*. Solving for *Q* yields *Q = 3.95*; plugging that quantity, 3.95, back into either demand or supply yields *P = $8.40*. For further review see section “Externalities”.