Assume that the demand for surfboards in a given town is P = 100-4Q and the supply for surfboards in that same town is given by P = Q.
A. What is the equilibrium price and quantity of surfboards sold in this town?
B. Now assume that the EPA has found that the making of surfboards produces toxic chemicals which are harmful to the environment, so the government decides to tax the production of surfboards at a rate of $40 per surfboard in order to internalize the externality related to surfboard production. What is the price that the consumer will now pay per surfboard? What is the amount of money that the producer will receive for each surfboard?
C. Who bears the larger incidence of taxation in this case? (prove this graphically, with equations, or with a couple of sentences that provide back up for your answer)