Consider a market where demand is p=10-2Q. There is a negative production externality of $2.50/unit of consumption. Supply is equal to p=Q/2.
What is the market equilibrium?
What is the social optimum quantity and price?
If the government uses a tax to get producers to internalize the externality what is the nest price received by producers?
Calculate the total surplus at the market equilibrium.
Calculate the total surplus at the Social optimum and with the tax.