The fizzwizzle industry is perfectly competitive. Supply is given by QS = 10 + P, and demand is given by QD = 20 – P. In the production of fizzwizzles, firms pollute. The cost of this pollution is 2Q, where Q is the quantity of fizzwizzles produced.
(a) If the government places a tax on fizzwizzle production, what is the efficient tax?
(b) If the government places a quota on fizzwizzle production, what is the efficient level of output?
(c) If the quota is used, how much surplus is gained (relative to the surplus in an unregulated market)?