Suppose we have a demand for energy: Q=2,000,000-25P where Q is the total amount of energy consumption in gigawatt hours and P is the price of power per fifawatt hour. Suppose we have a competitive industry of power plants that can produce up to 2,000,000 GWh of energy at a constant marginal cost price of $40,000 per GWh. Suppose each G@h of energy produced imposes $1 of acid rain damage.
1. what's the equilibrium price and quantity in the free market equilibrium
2. what's the best tax to impose on the power plant, why?
3. what's the equilibrium price and quantity in the optimal tax equilibrium?
4. what do you think is the best way to use the tax revenue?