Question

The demand curve for agricultural fertilizer with a watershed can be represented by Q = 40 – 2P. The marginal private costs are MPC = 0.5Q. Water quality effects (costs) arising from the application of nitrates and phosphates within the watershed are $5 per unit (note – this means that the water quality effects increase total costs by $5 per unit of Q).

1. Suppose the government places a tax on the energy sector that results in the socially optimal level of output (and price). Show graphically how much tax revenue will be collected.
2. Who is affected more by the tax – those who demand agricultural fertilizer (farmers) or those who supply it (fertilizer industry)? Why?

Answer 1