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Homework 2: Pigouvian Taxes Marginal Benefit = MB = 250 - 2*Q Marginal Private Cost =...

Homework 2: Pigouvian Taxes

Marginal Benefit = MB = 250 - 2*Q

Marginal Private Cost = MPC = 10 + 0.4*Q

Marginal Damage = 0.6*Q

Assume markets are perfectly competitive.

1. What would be the DWL from having total pollution damage be zero? (I’m not asking what if the private and social MC curves were the same, but rather what would be the DWL of choosing a quantity such that the total pollution damage was zero.)

2. Instead of having this market be perfectly competitive, let the supply side of the market be a monopoly. What would be the optimal Pigouvian tax to deal with the negative externality now? Show this on a graph that explains what’s going on.

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