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On the Island country of Economica, a perfectly competitive industry selling Oysters has a supply curve P = Q and a Marginal Private Benefits Curve:...

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2. On the Island country of Economica, a perfectly competitive industry selling Oysters has a supply curve P = Q and a Marginal Private Benefits Curve: MPB = 60 - Q. Assume that the Marginal Social Benefits curve (MSB) is the same as the MPB, but that production of the oysters creates pollution so that the Marginal Social Cost curve: MSC = 1/2Q; Recall that the Supply curve can also be equated to MC for the industry. Q is oysters in thousands of pound; P is the price of a 100 pounds of oysters in the Economica Shekels (¥). Answer the questions that follow. a) How many oysters will the industry produce if it is unregulated? At what price will the oysters be sold? b) What is the socially optimal level of production of the oysters on the Island?; what is the optimal price? c) You are hired to advise the government of the Island country on the best way to manage the economy in a sustainable manner. You propose an excise tax on oyster production and suggest using the revenue to clean up the pollution associated with the industry. i. Ceteris paribus, what level of excise tax should you propose and why? ii. How much tax revenue would you expect to raise from your proposed program? d) The Minister in charge of finance disagrees with you and suggests your proposed tax would cause Oyster production to fall by at least 50% hurting the economy tremendously. Draw a diagram of the said market, showing (with labels) the various curves; the price of oysters with and without the tax; the tax revenue per unit? Briefly discuss how your response to the minister’s argument.
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2. On the Island country of Economica, a perfectly competitive industry selling Oysters
has a supply curve P = Q and a Marginal Private Benefits Curve: MPB = 60 - Q. Assume
that the Marginal Social...

Sign up to view the full answer

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