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A set of perfectly competitive companies produce shoes. 1 pound of water pollution (WP) is released into the ocean which has a social cost of $c (per pound). The private cost of pollution is $o when unregulated. i) Graph supply and demand curves and show the output and price of the unregulated market as well as the socially optimal output. ii) Indicate on the graph the amount of tax that would lead to the socially optimal level of production. iii) One of the companies produces Q shoes. Say there are pollution-reducing machines, K, which cost $1 each. When K = 0 machines, WP = 1 pound. With higher K, WP is lower. Give the cost-minimizing choice of WP and K when pollution is unregulated? Please explain with a diagram. iv) What would be the optimal tax rate if the government were to tax water pollution? v) When output of shoes Q is held constant, how do K and WP change when a pollution tax is instated? %3D

A set of perfectly competitive companies produce shoes. 1 pound of water pollution (WP) is released into the ocean which has a social cost of $c (per pound). The private cost of pollution is $o when unregulated. i) Graph supply and demand curves and show the output and price of the unregulated market as well as the socially optimal output. ii) Indicate on the graph the amount of tax that would lead to the socially optimal level of production. iii) One of the companies produces Q shoes. Say there are pollution-reducing machines, K, which cost $1 each. When K = 0 machines, WP = 1 pound. With higher K, WP is lower. Give the cost-minimizing choice of WP and K when pollution is unregulated? Please explain with a diagram. iv) What would be the optimal tax rate if the government were to tax water pollution? v) When output of shoes Q is held constant, how do K and WP change when a pollution tax is instated? %3D

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter19: Externalities And Public Goods
Section: Chapter Questions
Problem 19.6P
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A set of perfectly competitive companies produce shoes. 1 pound of water pollution (WP) is released into the ocean which has a social cost of $c (per pound). The private cost of pollution is $0 when unregulated. i) Graph supply and demand curves and show the output and price of the unregulated market as well as the socially optimal output. ii) Indicate on the graph the amount of tax that would lead to the socially optimal level of production. iii) One of the companies produces Q shoes. Say there are pollution-reducing machines, K, which cost $1 each. When K = Ő machines, WP = 1 pound. With higher K, WP is lower. Give the cost-minimizing choice of WP and K when pollution is unregulated? Please explain with a diagram. iv) What would be the optimal tax rate if the government were to tax water pollution? v) When output of shoes Q is held constant, how do K and WP change when a pollution tax is instated?
Transcribed Image Text:A set of perfectly competitive companies produce shoes. 1 pound of water pollution (WP) is released into the ocean which has a social cost of $c (per pound). The private cost of pollution is $0 when unregulated. i) Graph supply and demand curves and show the output and price of the unregulated market as well as the socially optimal output. ii) Indicate on the graph the amount of tax that would lead to the socially optimal level of production. iii) One of the companies produces Q shoes. Say there are pollution-reducing machines, K, which cost $1 each. When K = Ő machines, WP = 1 pound. With higher K, WP is lower. Give the cost-minimizing choice of WP and K when pollution is unregulated? Please explain with a diagram. iv) What would be the optimal tax rate if the government were to tax water pollution? v) When output of shoes Q is held constant, how do K and WP change when a pollution tax is instated?
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