Suppose that the demand curve for new cars is Q = 120 - P (making inverse...

Suppose that the demand curve for new cars is Q = 120 - P (making inverse demand P = 120 - Q) and the supply curve cost is horizontal at $24 per car.

a. What is the equilibrium price and quantity of cars?

b. Now suppose that each car produces one unit of smog, that imposes an external cost of EC = 0.01s 2 . Total social costs are now the sum of the $24 in production costs and the 0.01Q 2 in externalities. What is the social costs per car at the equilibrium in part a?

c. At what level of output does social costs (SC = 24+0.01Q 2 ) intersect the demand curve?

d. How big would the Pigovian tax have to be to achieve this optimal number of cars?

e. Suppose new green technology cut the amount of smog per car to one-quarter of its previous level (SC = 24+0.0025Q 2 ). Now what is the optimal Pigovian tax?

Expert Solution

Rahul Sunny answered 2 years ago

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