A newsprint company has (private) marginal costs given by:

MCP

= 10

+ 0.1 Q Assume that the price of newsprint is determined, in a competitive market, to be $20 per unit. A by-product of the newsprint manufacturing process is sludge, which is dumped into a river. Suppose the costs of the sludgedumping are estimated to be $4 for every unit of newsprint manufactured.

(a) Determine the output of the newsprint firm.

(b) Determine the marginal social cost of the firm’s newsprint manufacturing. Calculate the socially optimal output of newsprint from this firm.

(c) In an attempt to induce the firm to produce the socially optimal output level, the government imposes an effluent fee on the firm of $5 per unit of newsprint produced. Calculate the firm’s output after implementation of the scheme.

(d) Does the tax have the desired effect? If not, what change would you suggest? Explain.