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MSB=MPB = 50 - 0.4Q
MPC = 2+0.2Q
MSC = 2+0.4Q

determine competitive equilibrium.
Determine the allocative efficient equilibrium.
what amount of a Pigouvian tax would result in the efficient equilibrium? what is the price producers would recieve and what is the price consumers would pay at this tax level?

3. A chemical manufacturing plant is releasing nitrogen into the air, and these emissions are associated with health and ecol


3. A chemical manufacturing plant is releasing nitrogen into the air, and these emissions are associated with health and ecol
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Answer #1

(3)

(a) In competitive equilibrium, MPB = MPC.

50 - 0.4Q = 2 + 0.2Q

0.6Q = 48

Q = 80

P = 50 - 0.4 x 80 = 50 - 32 = 18

(b) In efficient equilibrium, MPB = MSC.

50 - 0.4Q = 2 + 0.4Q

0.8Q = 48

Q = 60

P = 50 - 0.4 x 60 = 50 - 24 = 26

(c) When Q = 60,

MPC = 2 + 0.2 x 60 = 2 + 12 = 14

MSC = 2 + 0.4 x 60 = 2 + 24 = 26

Pigouvian tax per unit = MSC - MPC = 26 - 14 = 12

Price paid by consumers = 26

Price received by producers = MPC = 14

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