1) Suppose that the private market for widgets is characterized by the following supply and inverse demand functions:

D : P = 10 Q

S:P=Q

A) Find the private market equilibrium price and quantity.

B) Suppose the EPA calculates the marginal external cost (damage) of widget production is characterized

by: MD = $2. Graph the market with the externality and locate the the socially efficient equilibrium price and quantity. How much dead weight loss was produced by the private market.

C) Now suppose the EPA revises their MEC estimate to: MD = Q. Graph the market with the externality and locate the socially efficient equilibrium. Compare this with the outcome from part 2.