Consider the market for steel that also produces air pollution. The damages become more severe as steel production increases. The steel market is defined by the demand, supply and external costs below.
Demand: QD = 75 -0.5P
Supply: QS = max(-15 + 0.5P, 0) Note: This means QS = -15 + 0.5P, as long as
QS is positive. This is just the mathematical expression that the quantity supplied is never negative)
Total External Cost: TCE = 20Q + 0.5Q^2
(a) Calculate and graph the market quantity, price, consumer surplus, producer surplus, total external cost, and deadweight loss.
(b) Calculate and graph the efficient quantity and total external cost at this quantity.
(c) Explain the role of price at the efficient quantity. Hint: Think about MPWTp and MCp at the efficient quantity and use the graph to motivate your answer.
(d) Graph the equilibrium that produces the efficient quantity with a demand-side constant per-unit policy (constant per-unit tax or constant per-unit subsidy on consumers)? Calculate all relevant components of economic surplus.