Suppose the external marginal cost of pollution is MCexternal = 5Q and the internal marginal cost is MC(internal)
= 10Q. Further, assume the inverse demand for the product, Q, is given by P = 90 – Q.
What is the socially efficient level of output?
How much output would a competitive industry produce?
How much output would a monopoly produce?
Discuss three ways government can induce firms to produce the socially efficient level of output.