Problem 2 The following graphs show the aggregate market and a representative individual firm in industry Y: Aggregate Market Individual Firm Swith damage cost Price 14 MSC S without 13 damage cost 12 MC Damage cost Damage cost D= MR Demand 2,000 4,000 6,000 8,000 10,000 12,000 8 9 10 11 12 Quantity Quantity a. What are the profit maximizing quantities of the good for both the industry (Q,) and the representative individual firm (q1) when they are not forced to consider the externality? 1. Profit-maximizing quantity for the industry (Q1) ii. Profit-maximizing quantity for the representative individual firm (q1) b. Assume the firms in the industry are not forced to consider the externality, calculate: 1. What is the equilibrium price (P,) in the aggregate market? ii. Calculate the consumer surplus. iii. Calculate the producer surplus. iv . Calculate the total damage cost. v . What is the total surplus less the total damage cost? . Suppose the government wants the firms in the industry to internalize the negative externality by imposing a Pigouvian tax: i. What should the government set the tax rate as? ii. What is the new industry equilibrium price (P2) and quantity (Q2)? iii. What will the new equilibrium quantity (q2) be for the representative individual firm? . Calculate the consumer surplus. v. Calculate the producer surplus. vi. Calculate the total damage cost. vii. Calculate the total tax revenue. viii. What is the sum of the total surplus and tax revenue less the total damage cost