Question

cost of cleanup is constant at $120 per unit. What is the optimal level of pollution cleanup in each of the two regions? 12. The private marginal benefit associated with a product's consumption is PMB = 350 – 4Q and the private marginal cost associated with its production is PMC = 6Q. Furthermore, the marginal external damage associated with this good's production is MD = 4Q. To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should it set to achieve the social optimum? 13. Suppose that demand for a product is Q = 1200 - 4P and supply is Q = -240 + 2P. Fur- thermore cuoce the 1

Answer 1

Marginal private benefit=PMB=350-4Q

Marginal social cost=MSC=PMC+MD=6Q+4Q=10Q

In equilibrium, PMB=MSC i.e

350-4Q=10Q

14Q=350

Q=350/14=25 units

Socially optimal output is 25 units.

Optimal Tax=Marginal damage at output of 25 units=4Q=4*25=$100