Assume that a chemical company introduces a new compound, the production of which generates a negative externality. The environmental regulatory authority has estimated the following marginal costs and benefits for this new market:

MSB = 75 − 0.3Q

MEB   =  0

MPC = 25 + 0.2Q

MEC = 0.5Q,

where Q is annual output in thousands of pounds, and P is price per pound measured in dollars.

a. For this new market, find the competitive equilibrium, Q_C and P_C, and the efficient equilibrium, Q_E and P_E. 

b. Now suppose that the regulatory authority wants to internalize the externality by imposing a product charge on the new compound. Calculate the dollar value of a product charge that would achieve the efficient solution. Graphically illustrate this product charge and the competitive and efficient solutions.