Consider the market for smelted kryptonite depicted below. A by-product of kryptonite smelting is the release of clouds of toxic blackishyellow smoke. Each ton of toxic smoke emitted causes nearby residents' health-care expenditures to rise; the external marginal costs associated with the toxic exhaust are depicted as EMC on the graph:
a. On the diagram, carefully graph the social marginal cost curve associated with the kryptonite industry. Precision matters!
b. Without any environmental regulation, how much kryptonite is produced?
c. From society's standpoint, how much kryptonite should be produced?
d. Regulators can achieve the efficient level of kryptonite production by imposing a tax on kryptonite production. To achieve the efficient level of production, how big should that tax be?
e. Draw an industry supply curve that reflects the tax you determined in part (d). Show that private producers, forced to internalize their externality by the tax, produce the socially optimal amount.
f. Could the same result have been achieved by assessing a tax on the buyers of kryptonite? If so, how much would that tax need to be?