Problem 2 - Negative Externalities (Market): The Colorado Department of Transportation oversees snow removal in Colorado. Still, this task is performed by private companies that use a sand/salt mixture that works as freezing-point depressants. The monthly inverse demand for sand/salt mixture is P = 90 - 110Q, where the price is measured in dollars and quantity in tons. The sand/salt mixture market is perfectly competitive, and the price (inverse supply) is equal to $20 per ton: P = 20. a) How many tons of salt/sand mixture will be purchased? Calculate the consumer and producer surplus and illustrate your answers on a graph. Unfortunately, the use of sand/salt mixture has a negative external effect on drivers. First, it increases the cost of car maintenance because the sand/salt mixture corrodes vehicles and damages windshields. Second, it increases the cost of car insurance because the salt in the mixture attracts deer, elk, and Big Horn sheep, increasing the probability of vehicle-animal collisions/injuries. It has been estimated that the external marginal cost (EMC) of each additional ton of sand/salt mixture used on the roads of Colorado is equal to $15 i.e., EMC = 15. b) What is the external total cost (ETC) to drivers at the equilibrium quantity that you found in a)? c) What is the equation for the social marginal cost (SMC) of sand/salt mixture consumption? d) What is the socially optimal level of consumption? Illustrate both the socially optimal level of salt/sand mixture and the market level of salt/sand mixture from part a) on a new graph. e) Does marginal cost pricing lead to too much or too little of the sand/salt mixture being sold? Explain in less than five lines. f) Explain why consuming the socially optimal production level is Pareto efficient. In your explanation, refer to a graph indicating the change in consumer surplus and external total cost and the net gain to society. (Hint: No need to perform any numerical calculations.) g) What is the Pigouvian tax rate that the government should impose on sand/salt mixture to achieve the socially optimal level of consumption? Illustrate your answer on a new graph. Recently, the State of Colorado relaxed the purchasing standards for sand to save money, which has resulted in the widespread use of a lower quality sand/salt mixture. The new sand/salt mixture purchased is cheaper but contains a larger number of rocks responsible for vehicle damage. 3 h) Illustrate the effect of this decision on a new graph. Make sure that you also indicate the level of consumption that you found in part a). Did the State of Colorado increase or decrease the total external cost on drivers by allowing private companies to purchase lower-quality sand at lower prices? Explain.