Woodonia, the world's leading exporter of bespoke wooden furniture, produces the furniture at a per-unit cost of Q = P + 60 and the market demand is Q = 120 - P. However, the production of bespoke furniture comes with a signicant negative externality deforestation! The externality cost is $40 per piece of furniture. In addition, the country is opened up to free trade at a world price of $100.
1. Find and draw the domestic equilibrium
2. Find and draw the free trade equilibrium
3. Find and draw the socially optimal equilibrium
4. A policy maker is proposing to use an export tax to achieve the socially optimal level of production.
What would be the impact of an export tax on your graphs? Will this policy be eective?