Question: Consider an industry with demand q = 120 - 3p and supply q = 2p - 10. Suppose that production is polluting the environment and that the marginal social cost of production is given by MSC(q) = 1/2 q2.
(a) What is the level of production in the market equilibrium?
(b) What is the socially optimal level of production?
(c) Determine the Pigou tax that achieves the social optimum.