Question

In western Wyoming, natural gas production produces a significant amount of ozone emissions. On really cold days in the winter, temperature inversions trap the ozone near the ground, and the unusually high levels of ozone in the atmosphere cause significant health issues for residents

a) Using a simple supply and demand diagram, model this negative externality associated with natural gas production. Be sure to show both the competitive and socially optimal equilibrium prices and output of natural gas.

b) Using your diagram, show the increase in economic welfare that would result from moving from the competitive to the socially optimal equilibrium

c) How might the Wyoming state government construct a policy that would induce the natural gas companies to produce the socially optimal amount of natural gas? Mathematically demonstrate your answer.

Answer 1