Reference no: EM132950001

The marginal external cost associated with the emissions of sulfur dioxide is estimated to be $15 per kilo of this chemical per year. Assume that each ton of steel produced per year results in 2.5 kilos of sulfur dioxide emissions. Suppose that the supply of steel is infinitely elastic at a price of $500 per ton. The current equilibrium output of steel produced by a competitive industry is 10,000 tons.

a) Show how a corrective tax can be used to achieve efficiency. Predict the impact of the tax on the equilibrium price and quantity of steel. Explain how steel companies will react to the tax. Indicate the amount of tax revenue that will be collected.

b) Discuss the political support for the tax. In your discussion, show the net gain in wellbeing possible from the tax and indicate which groups will gain and which groups will lose as a result of its imposition.