Efficient pigouvian tax on sulfur producers

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Suppose there are two industries in an economy: sulfur mining and perfume manufacturing. The demand for sulfur is characterized by the private marginal benefit equation PMB = P = 100 - 2Qs, where P is the price sulfur consumers pay and (29 is the quantity of sulfur consumed. The sulfur producers' private marginal cost is PMC = 10 + Q9. The sulfur makes the neighborhood smell bad, which harms the perfume industry (an externality). The social marginal cost of sulfur production is SMC = 20 + 205.

a. What would be the efficient Pigouvian tax on sulfur producers? (Show how you calculated the answer.)

b. By how much would this tax cause the price consumers pay for sulfur to increase? (Show how you calculated the answer.)

Reference no: EM133079486

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