a. Consider our competitive market, describe by the supply and demand model. If there are no externalities, explain why economists describe the competitive equilibrium an efficient.
b. Suppose instead that all of the firms in this market vent an ozone reducing chemical into the atmosphere as a consequence of their production activies.
1. Is this new outcome efficient? Explain with help of a diagram
2. Do these firms have an incentive to reduce their pollution? Explain with help of a diagram
3. Modern economists suggest 2 solutions for the pollution problem above. Explain how a pollution tax and an emission permit trading scheme can both "solve" the problem of pollution.
4. Suppose the polluter from above is not a competitive industry but instead is a monopolist. How does this complicate your analysis of the pollution problem and its solution?