Reference no: EM132482425

Suppose that the demand and supply functions in a given market are expressed by QD = 50 - 8P and QS = 2P, respectively. The production of this good releases sulfur dioxide into the atmosphere which negatively impacts everyone living near a manufacturing plant. A group of scientists estimates that pollution is related to the amount produced in the industry according to the function SO2 = 0.2Q, where Q is the quantity produced in the market and SO2 is the value of sulfur dioxide tons generated by firms. It is also uncovered that the marginal social cost in production is expressed by the function MSC = 0.5Q + 5.

a) Determine the equilibrium price and quantity in this market when no government intervention takes place. Is there overproduction or underproduction relative to the social optimum? Explain.

b) Represent the marginal social cost function on a graph, along with the demand and supply curves in this market. Determine the socially efficient quantity for this market and represent it on your graph.

c) Suppose now that the government decides to regulate emissions in this industry. What is the maximum level of sulfur dioxide the government should allow firms to release so that we achieve an efficient outcome? Explain.

d) Assume that the marginal external cost is always the same, regardless of the quantity produced. Use the graph you constructed in part b to determine what is the minimum level of these external costs that would make it efficient to close down the industry. Represent that outcome on your graph.