(P,Q)=(3,40.499)

Q=123.83327.7783=40.499

The externality is $2.10 that Strawble imposes on the farmer when it produces 1 box of paper straws. $5 x 0.42 = $2.10

After learning of this externality, youas the state regulator who oversees the paper industry want to help this market achieve the socially optimal outcome for the good of the overall economy. Determine the socially optimal outcome and what regulation would achieve it.

(a) [1 point] Remember from Homework 1 that Strawble can produce a box of paper straws at a private marginal cost of $3. When you also consider the air pollution externality, what is the social marginal cost of producing one box of paper straws?

(b) [1 point] What "rule of thumb" can you use to determine the socially optimal market outcome in the presence of this externality?

(c) [1 points] What is the socially optimal price and quantity of paper straws for this firm? That is, at what price and quantity is this rule satisfied and the market clears? (Remember that we estimated Strawble's demand function in Homework 1. Check the solutions to make sure you are using the correct demand function.)

P=4.458-.036Q

Q= 123.833 - 27.778P

4.458 - .036Q = 3 Q=40.5

(d) [1 point] How does this socially optimal price and quantity compare to the privately optimal price and quantity, which we found in Homework 1?

HW 1: Q=123.83327.7783=40.499

(e) [1 point] What level of Pigouvian taxexpressed in dollars per box of paper straws produced would achieve this socially optimal outcome?

(f) [2 points] There are now four components to the total economic value of this market: firm profit, consumer surplus, externality damages, and government revenues. Calculate each of these components at the socially optimal outcome under the Pigouvian tax. What is the total economic value (or welfare or surplus) generated by this market at the socially optimal outcome?

(g) [2 points] How does the total economic value and each of its components compare to those at the privately optimal price and quantity?