Question

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Answer 1

There are two types of costs involved here. Marginal Private Costs ($100) and Marginal Social Costs ($100 + $50 = $150). 1) Venessa's profit will be maximised if she only pays her private costs, i.e. $100/cow. Profit is maximum when marginal revenue = marginal cost Marginal private cost = $100 Marginal Revenue = 500 - 2Q Max Profit Qty => 500 - 2Q = 100 400 = 2Q Q = 200 2) For socially optimal qty, we will consider the marginal social costs = $150/Cow Socially optimal qty => Marginal Revenue = Marginal Social Cost 500 - 2Q = 150 350 = 2Q Q = 175 3) Pigouvian Tax is the difference between the marginal social cost and marginal private costs. Therefore, Tax rate = $150 - $100 = $50/Cow