John has a factory that produces paper and as a side product some chemicals are thrown into the water: one unit of the pollutant per unit of paper. The marginal benefit to John of producing paper is given by MB = 10 – Q. The marginal cost is given by MC = 3 + Q. Amy's fishing decreases with pollution: for each unit of pollutant, her income decreases by $1.
a. What is the socially efficient quantity of paper to produce?
b. What quantity will be produced by John privately? What is the net social loss (deadweight loss) associated with this?
c. Suppose the government does not know John's marginal cost, what policy can it implement to make John produce the efficient amount?