In the Troubled Waters region, the delivery of water supply and waste water services is provided by Troubled Waters Utilities (TWU).

The inverse demand curve is P(Q) = 10 Q, where P is measured in dollars.

Under normal conditions, the marginal cost (i.e. the marginal cost of supplying water and waste water service) is constant and equal to 5 dollars, MC(Q) = 5.

When the dam levels are high, however, the experts at TWU estimate that water consumption reduces costs of preventing floods and associated damage.

It is estimated that each extra unit of water consumption reduces those costs by 1 dollar.

(b) Compute the efficient level of production when the dam level is high. Calculate the Pigouvian tax or subsidy required to achieve the efficient level of output. What is the deadweight loss associated to that production level? (explain briefly). (5 marks