A perfectly competitive industry has an inverse demand for its output given by p Q =? 100, and its supply function is given by MC Q = + 30. The process of making Q also generates pollution, g, in the amount g Q = ? 0.5, and the total external cost of g to society is 2 EC g =? 3.
a) What is the industry’s marginal external cost function?
b) If the industry chooses its output level ignoring the marginal external costs, how much output will there be?
c) What is the socially optimal level of output?
d) If you were to design a unit tax on output to achieve the socially optimal output level, how big would this tax be?