1. Consider the example of household refuse collection in Minneapolis. Assume that the marginal social cost (MSC) of collecting and disposing of it is $0.15/lb. Suppose that in 2011 there was a fee of $0.05/lb being charged and the quatity of refuse collected was 2.5lb/p/d. Suppose that in 2012 the fee was $0.1/lb and the quantity of refuse collected was 2.00lb/p/d. Now, the government is planning to increase the fee in 2014 to $0.12/lb.
(a) Assuming a linear demand function, calculate the change in total surplus from an increase in the fee from $0.10/lb to $0.12/lb.
(b) What is the optimal fee that would maximize social surplus?