Consider the following demand curve, Qd = 100 – 2P and supply curve Qs = 8P-120.
a. Find the equilibrium price, quantity, and producer surplus.
b. In turns out that the production of the firm causes pollution. The Marginal Social Cost curve, Qs = 8P – 200. Calculate the size of the damage on society before the tax (be careful).
c. What would be the correct Pigouvian tax in this case?
d. A new technology exist that could remove the pollution. Comparing producer surplus under the right to pollute (a) and being taxed (b), what is the most the firm would be willing to pay?
e. If the rights to pollute are given to firm and the price of the new technology is $64 would the victims of pollution be willing to purchase the technology?