Question

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.

a.
What is the socially efficient level of output?

b.
How much output would a competitive industry produce?

c.
How much output would a monopoly produce?

d.
Discuss three ways government can induce firms to produce the socially efficient level of output.

Economics