Problem: Suppose that the (inverse) market demand curve for a certain drug is given by: p=100-q and the market supply curve is given by p=q. Suppose also that the drug is created from a bodily fluid extracted from an endangered species. Extracting the fluid kills the animal. Since society places some value on the existence of the animal, the production of the drug incurs additional societal costs beyond those which are already reflected in the market supply curve. Specifically, suppose that the marginal cost to society (beyond the direct production cost of the drug) is equal to 2q.
Q1. What is the quantity of drugs that is produced by the market?
Q2. What is the socially efficient quantity of drugs that should be produced?
Q3. What size of Pigouvian tax should result in the efficient quantity of drugs being produced?