Suppose that the oil refining industry releases one unit of waste into the atmosphere for each unit of refined product.
Demand: P = 20 - Q
Supply: P = 2 + Q
Marginal damage is given by:
MD = .5Q
a. Find the equilibrium price and quantity
b. Suppose the government imposes a corrective tax of T per unit of unit of emission. How large should T be if the market is to produce the socially efficient amount of the refined product?
c. How much revenue would be raised by the corrective tax?