Compute the dollar amount of total external cost generated

Reference no: EM133501095

Problem: Assume an otherwise well-functioning competitive market with the following: Demand: P = 1050 - 0.1Q; Private-cost supply: P = 50 0.2Q. Production of each unit of output Q above leads to a marginal external cost of $150, which implies social-cost supply: P = 200 0.2Q. A. Assuming firms can freely pollute in the absence of regulation, compute the "free market" equilibrium P, Q? B. Compute the dollar amount of total external cost generated when firms can freely pollute in the market equilibrium above, and derive the actual total net gains from trade. Show your work? C. Assuming firms pay a tax and thus operate along the social cost supply curve, compute the "socially optimal" equilibrium P, Q, and total actual gains from trade. Assume the tax revenue fully offsets any remaining negative externalities. Show your work?

Reference no: EM133501095

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