Externality: Regulation vs. Taxation- The government believes that marginal benefit of reducing air pollution follows the following function MB = 1000 2Q. Moreover, the government believes that the marginal cost of reducing air pollution is as follows MC1 = 100 + Q. Answer the following questions and make sure you show your work:

1. If the government is correct about its assumptions, what is the level of per unit tax that achieves the socially optimal pollution reduction? What is the quantity regulation (in terms of pollution reduction) that would achieve the same socially optimal outcome?

2. Assume the government was wrong and the real marginal cost of pollution reduction is as follows: MC2 = 200 + 2Q (note that both intercept and slope are different) a. What is the true socially optimum level (i.e., quantity) of pollution reduction? b. What is the deadweight loss of the tax imposed based on the MC1 c. What is the deadweight loss of the quantity regulation imposed based on MC1