Consider a market where demand is P=10-2Q. There is a negative production externality of $2.50/unit of consumption. Supply is equal to ??=??2.
1. What is market equilibrium?
2. What is the socially optimum quantity and price?
3. If the government uses a tax to get producers to internalize the externality what is the net price received by producers?
4. Calculate the total surplus at market equilibrium
5. Calculate the total surplus at social optimum equilibrium
6. Calculate the total surplus with the tax.