When calculating an optimal Pigouvian tax, you set marginal social cost of production equal to marginal social benefit. What assumption does this make about the benefits provided by the government revenue from the tax?

B. Describe some of the difficulties that would go into implementing an optimal Pigouvian tax. Be sure to discuss both the difficulties of implementing the tax aswell as the difficulties of solving for the optimal tax in real life.

C. The production of safety signs produces both positive and negative extemalities, because they provide useful information to everyone, but also the paint can sometimes leak into the environment. And so, while inverse demand and supply areP = 60 — 2QD and P =10 + 3QS, we have MSB = 80 -— Q and MSC = 20 + 4QS.

Calculate the market and efficient quantities, and the optimal Pigouvian tax or subsidy. Then, graph this market, showing the supply curve without and with thetax in place (noting when slopes are different).

D. Give three examples of actual taxes or subsidies designed mostly to increase/

decrease use rather than collect revenues. You may want to use the intemet to dosome research on this. If you’re having trouble, you might get started looking for taxes referred to as “sin taxes.”

E. Diane routinely annoys her neighbor James because she doesn’t mow her lawn.

James values her having a mowed lawn at $5 per day, and Diane values not hav—ing to mow her lawn at $8 per day.

a. If Diane has the right to do what she likes with her lawn, explain what wouldhappen if Diane and James bargained as in the Coase theorem.

b. Solve part a again, but this time James has the right to force Diane to mow her lawn (perhaps they live under a homeowner’s association).

F. Consider once again Question 9 in the Follow—the-Steps Questions section.

However, this time, Amy owns the pond, and James pays Amy for each fish hecatches.

a. How many fish will be caught this year?

b. Intuitively, why would Amy owning the pond make a difference as to whether the outcome is efficient or not?

G. Explain intuitively why a per-unit subsidy (like a Pigouvian subsidy) wouldn’t be a great way of producing the optimal amount of a public good.
H. Consider two different types of goods—one is a public good. The other is a private good with a huge positive extemality—so huge that marginal private benefit is very, very tiny relative to marginal social benefit. What is the differencebetween these two goods?
I. Two factories, A and B, produce 10 units of pollution each per year. The marginal cost of reducing pollution is MCA= QAfor firm A and MC = 4 + QB for firm B. The social marginal benefit of reducing pollution is MSB = 6, but theprivate marginal benefit is O.

a. If the government imposed a tax of 6 for each unit of pollution, what wouldQAand QBbe?

b. If the government imposed a quota and said, “Each factory must reduce pollution by X units,” where X is the average of what you found for QAand QBin part

a, would this be more or less efficient than the tax?
J. You oversee the government and are trying to decide what to do about the publicgood of streetlights. You are trying to decide whether to have the government provide streetlights directly (public provision), or whether to have the govemment subsidize streetlight makers (subsidy). Give two reasons in favor of publicprovision, and two in favor of subsidy.