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3. The Highlands has a perfectly competitive market for beef with monthly supply and demand as represented in the graph below. Beef production generates environmental

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3. The Highlands has a perfectly competitive market for beef with monthly supply and demand as represented in the graph below. Beef production generates environmental pollution such that each pound of beef produced incurs an additional marginal external cost of $2. price $ 12 11 10 8 A w N 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 pounds of beef '000 A. What is the socially efficient quantity of beef production and how does it compare to the market outcome? Explain, and illustrate your answer on the graph. B. What is the efficiency loss associated with the market outcome? Explain your reasoning. C. The governor of the Highlands is considering using a tax to achieve the socially efficient outcome. What unit tax would accomplish this? What would be the post-tax price paid by consumers and how much tax revenue would be raised? D. The governor has learned that the efficiency loss used to be very different 30 years ago. This is puzzling to her since not much has changed: each pound of beef also used to incur an additional marginal external cost of $2, consumer demand has been constant for years, and there was no tax 30 years ago. The only thing that was different is that the beef industry used to be controlled by a monopolist whose marginal cost was equal to the supply curve drawn in the graph above. What was the price and quantity in the market 30 years ago? Explain and illustrate your answer on the graph. [Hint: the marginal curve for a monopolist always has twice the slope of the demand curve.] E. What was the efficiency loss 30 years ago? How does this compare to your answer to part B? Explain to the governor how the change in market structure led to any differences in efficiency

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