1. Consider the following supply-and-demand schedule for steel:

Price per ton ($) 20 40 60 80 100 120 140 160 180 QD (million tons) 200 180 160 140 120 100 80 60 40 QS

(million tons) 20 60 100 140 180 220 260 300 340 Pollution from steel production is estimated to create an external cost of

$60 per ton.

a. Using a supply-and-demand graph to support your answer, what is the unregulated market equilibrium (price and quantity) in the steel market?

b. Add the external costs to your graph from part (a). What is the socially optimal outcome in the steel market (price and quantity)? What economic policy could be implemented to achieve the social optimum?

c. Using either your previous graph or creating a new one, use welfare analysis to demonstrate that total social welfare is greater at the social optimum than with the unregulated market outcome. You don’t need to calculate numerical welfare values; just identify areas as in Figure 3.9.