Consumption of styrofoam food or beverage containers causes a negative externality because when the containers are discarded they cause environmental damage. Suppose demand (MPB) for styrofoam containers is given by P = 1 - 0.003Q, supply (MPC) is P = 0.1 + 0.002Q, and the external cost is given by MEC = 0.001Q.
a) Calculate the market equilibrium quantity of styrofoam QM.
b) Calculate the socially efficient quantity Q*.
c) Graph the marginal private benefits and cost curves and the marginal social benefit curve on one diagram. Label appropriately.
d) Calculate the loss of surplus in the competitive market.
e) How much should the tax or subsidy be per unit of the good produced to make the market outcome efficient?