A firm producing batteries is letting the acid leak into a local river. Each ounce of acid in the river causes $50 of damage to a downstream oyster farm.
a. Graph the market for batteries, with a demand curve of P= −Q + 200 and private supply curve of P=Q .
b. Now graph the social marginal cost curve. Illustrate the deadweight loss of the private equilibrium.
c. How much of a tax per unit would the government need to impose to force the battery firm to internalize the externality? What quantity regulation could the government implement to arrive at the socially optimal output? What about this situation allows these two methods of intervention to achieve the same result?