Imagine that the private marginal benet to a steel firm for producing Q tons of steel is

10-Q=4. The private marginal cost of producing Q tons of steel is constant at $4. Each

ton of steel produced by the firm is associated with pollution that affects downstream

activities. Specifically, the marginal external damage imposed on downstream groups

is $Q/2.

(a) Sketch the following curves... marginal private benet (MPB), marginal private

cost (MC), marginal external damage (MED) and marginal social cost (MSC).

(b) With no government intervention, how much Q is produced by the steel firm?

Identify this point on your graph.

(c) What is the socially efficient level of production? Identify this point on your

graph.

(d) Imagine that the steel firm and the downstream group engage in Coasian bar-

gaining. Explain the offers that the downstream group would make and the steel

firm would accept.

(e) If there are no bargaining costs, what will be the bargaining outcome (how many

units of steel will the firm agree to produce)?

(f) If the payments cannot vary per unit, what will be the total payment that the

downstream group makes to the steel firm in the Coasian outcome? Are the two

sides better o? Explain why or why not.

(g) Alternatively, the government can intervene. What is the Pigouvian tax that

would lead to the efficient level of production? Explain the logic of Pigouvian

corrective policy.

(h) How much revenue would the tax raise?