Homework answers / question archive / Suppose the (external) damage done by pollution is known to be MD=300+5q, and the (private) cost and benefit are given by MC=100+2q and MB=D-2q, where D is not known

Suppose the (external) damage done by pollution is known to be MD=300+5q, and the (private) cost and benefit are given by MC=100+2q and MB=D-2q, where D is not known

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Suppose the (external) damage done by pollution is known to be

MD=300+5q, and the (private) cost and benefit are given by

MC=100+2q and MB=D-2q, where D is not known.

a)If d=1000, what would be the optimal quantity? What tax would be necessary in order for that to be the equilibrium quantity?

b)Suppose that, based on the result from part (a), a cap-and-trade system is imposed to allow the optimal quantity of pollution to be produced. If D=900, what would be the dead-weight loss associated with having the wrong quantity?

c)Suppose that, based on the result from part (a), a tax is imposed to allow the optimal quantity of pollution to be produced. If D=900, what would be the dead-weight loss associated with the wrong tax level?

d)If D is not exactly known, which is likely to give better results, a cap-and-trade system or a tax? What would be the answer to this question if MD were 300+3Q instead of 300+5q