A paint factory produces paints, but in the process transmits chemicals into the soil below the factory. These chemicals taint the soil such that the farmer whose land abuts the paint factory property experiences a reduction in soil quality and hence crop output. Assume the paint company's marginal benefit (demand) curve for its output is the following:
300-Q. It's marginal cost of producing is as follows: MC = 20 + Q. The farmer experiences a reduction in farm profit that can be described with the following Marginal Damage curve: MD = 40 + 2Q.
1. What output level does the paint company choose?
2. What is the socially optimal level of output?
3. Describe a possible Coasian solution to the externality problem.
4. What corrective tax could the government set to achieve the socially optimal level of output from the paint company?