Several chemical firms in Portland produce polymers and plastics, including polyethylene, polypropylene and polyvinyl chloride; these companies have been working hard to reduce the pollution generated by their production process. However, a recent study reveals that they have failed reducing the following pollutants: ammonia, nitrogen oxides, mercury, nitrates, methanol and benzene. These chemicals are released into the air and water. The local government is studying the possibility of reducing the environmental damage
produced by these fi rms. The available information on the chemical market is the following:
Demand : P = 30 - 2q
Marginal PrivateCost : MPC = q + 3
Marginal External Cost : MEC = -0:5 + q
1. Construct a Graph describing the Demand Function, MPC, MEC and Marginal Social Cost lines. (3points)
2. Determine the optimal quantity level and price without local government intervention. (3 points)
3. Determine the optimal quantity level and price with Tax. (3 points)
4. What is the optimal tax per unit produced? (2 Points)
5. Compare Consumer Surplus, Producer Surplus, Deadweight Loss and Government Revenue with and
without tax. Discuss your results. (4 points)
This question was asked on Dec 07, 2012 and answered on Dec 07, 2012.
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