Suppose that the supply curve(private marginal cost)for a manufactured good is given by ?s=1/2p and that...

Suppose that the supply curve(private marginal cost)for a manufactured good is given by ?s=1/2p and that the demand for the productis given by ?d=14−p.Environmental damage is represented by the function MD= 1+Q.

a)What is the optimal Pigouvian tax to address the externality?

b)After the tax is imposed, what arethe levels of CS, PS, environmental damage, and tax revenue?

Solutions

Expert Solution

Please note that calculation of producer surplus (PS) after Pigouvian tax is illustrated at the end. Refer to this in case you find it difficult to understand in its place. Sorry for the patchy work there.

Rahul Sunny answered 1 year ago

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