A competitive refining industry releases one unit of waste into the atmosphere for each unit of refined product. The inverse demand function for the refined product is pd = 20 q, which represents the marginal benefit curve where q is the quantity consumed when the consumers pay price pd. The inverse supply curve for refining is MPC = 2 + q, which represents the marginal private cost curve when the industry produces q units. The marginal external cost curve is MEC = 0:5q, where MEC is the marginal external cost when the industry releases q units of waste. Marginal social cost is given by MSC = MPC + MEC.
a. What are the equilibrium price and quantity for the refined product when there is no correction for the externality?
b. How much of the chemical should the market supply at the social optimum?
c. How large is the deadweight loss from the externality?
d. Suppose that the government imposes an emission fee of T per unit of emissions. How large must the emission fee be if the market is to produce the socially ancient amount of the refined product?