A competitive refining industry produces one unit of waste for each unit of refined product. The industry disposes of the waste by releasing it into the atmosphere. The inverse demand curve for the refined product (which is also the marginal benefit curve) is Pd = 24 - Q, where Q is the quantity consumed when the price consumers pay is Pd.The inverse supply curve (also the marginal private cost curve) for refining is MPC = 2 + Q, where MPC is the marginal private cost when the industry produces Q units. The marginal external cost curve is MEC = 0.5Q, where MEC is the marginal external cost when the industry releases Q units of waste.
a) What are the equilibrium price and quantity for the refined product when there is no correction for the externality?
b) How much of the chemical should the market supply at the social optimum?
c) How large is the deadweight loss from the externality?
d) Suppose the government imposes an emissions fee of $T per unit of emissions. How large should the emissions fee be if the market is to produce the economically efficient amount of the refined product?
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