Consider a monopolist with a private MC of $20 per unit who faces a demand curve of P = 100 - q.There is also a negative consumption externality in the market of $40 per unit.The government successively introduces competition into the supply side of the market, so now instead of a monopolist there are many price-taking firms.Which statement is true?
A) The government intervention increases the DWL in the market from 0 to $800.
B) The government intervention in the market decreases the DWL from $800 to $0.
C) The government intervention reduces but does not eliminate DWL in the market.
D) The government intervention increases DWL from $0 to $1600.
E) None of the above.
Correct Answer:
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