A firm in a perfectly competitive industry faces a market price for their product of $20 per unit. Their marginal cost function is P=.4Q.
A. How many units of the product will the firm produce? Sketch your solution.
Unfortunately, the government has determined that firms in this industry are polluting the air and a study estimates that the marginal external cost of the pollution from this firm is P=.1Q.
B. What is the marginal social cost of production taking into account the externality? What is the socially optimal level of production for this firm? What is the dead weight loss from unregulated production?
C. What should be the amount of a government imposed Pigouvian tax be in order to bring about the optimal level of production? Add your solutions to parts b. and c. to your sketch.
D. What is the economic incidence of the tax. What are the revenues from the tax?
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