Find the social marginal cost curve

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Reference no: EM132201215

Question: The demand (MB) for a good is given by P= 20-Q. The private marginal cost is given by PMC= 6+Q, and the marginal damage function is given by MD = 2+Q.

Note: the optimal tax is the difference in price between the private marginal cost and the social marginal cost at the socially optimal quantity, NOT at the private optimal quantity.

Find the social marginal cost curve.

Find the optimal tax rate that can induce producers to reduce output to social optimal level.

Calculate the gain (damage avoided), loss (loss of producer + consumer surplus caused by less output) and net gain (avoided DWL caused by pollution) of the tax.

Reference no: EM132201215

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