An ice-cream factory produces output at C = q
2
, where q is the quantity of
ice-creams produced, in tons. In addition, 2 units of emissions are produced for each ton of icecreams (e = 2q). Pollution damage is $2 for each unit of emissions, which leads the government to charge $2 per unit of emissions as a Pigovian fee. The firm's output sells competitively for $10 per ton.
4.1. [15 points] How many tons of ice-creams will the factory produce? How much does it pay in emission fees? What are its profits?
4.2. [15 points] A device is invented that would reduce the firm's emissions to one unit for each town of output (e = q). How much would the firm be willing to pay for such a device?