Demand: P = 7 – 2Q
Supply: P = 4 + Q
Where P is output price in $/bushel and Q is billions (1,000,000,000s) of bushels.
Suppose there is a negative externality associated with wheat production. The costs that it imposes on society from water quality and soil erosion issues are estimated to be $1.50 higher per bushel than the private costs reflected in our supply function.
How much is the total estimated externality cost being borne by society? (hint: the per bushel externality cost time the total bushels produced at market equilibrium)
What do we call a tax that is designed with a goal of correcting for a negative externality?
How much would such a tax have to be to achieve this goal in this market?