Instructor: Justin Krieg
Econ 251 – Problem Set 4
Question #1
Consider a number of factories who faces the demand curve given by
50
d
P
Q
=

.
The
factories produce a good that requires heavy manufacturing techniques, requiring disposal of
hazardous materials.
Currently, the factories dump these materials on a nearby piece of land,
which is not currently owned by anyone.
The marginal external damage incurred by this action
is equal to
2Q
and falls upon the citizens of the city in which the factories operate.
The factories
incur a marginal cost of production given by the following equation:
10
MC
Q
=
+
.
Note: Be
sure to use graphs in your answers below
.
a. Find the market equilibrium quantity and price when the factories does not account for the
external damages.
b. What is the socially optimal quantity and price for the market?
c. Find the value of dead weight loss from the firm’s choice in part a.
d. Find the per unit Pigovian tax that induces the socially optimal quantity and price.
Show
graphically that this tax will yield the socially optimal quantity and price.
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 Summer '08
 Blanchard
 Economics, Supply And Demand, socially optimal quantity, Justin Krieg Econ

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