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April 4, 2024

FU Production and Tax for Externality Exercise

The inverse demand curve associated with a product is P = 2250 ? 2QD, and the inverse supply curve associated with its production is P = 8QS.

What is the free market level of production?

Suppose that the marginal damages of production from this good are MD = 70. What is the socially optimal level of production? What is the deadweight loss?

To correct the externality, the government decides to impose a tax of t per unit sold. What should t be to achieve the social optimum?

Now suppose the marginal damages are not constant with MD = 5Q. Now what is the socially optimal level of production? What is the deadweight loss?

What tax t should the government set to achieve the social optimum if MD = 5Q?

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