Q2. The inverse demand curve for leather is given by P=50-0.5Q. The industry supply of leather is determined by its marginal cost: MC = 0.45Q.

Suppose the production of leather causes noxious chemical residue to leach into groundwater supplies. The external marginal cost caused by these residues grows with the amount of output, and is measured as EMC =0.05Q.

Suppose the government wishes to reduce the externality to efficient levels by imposing a restriction on quantity (a quota).

1.What maximum level of output should it set for leather production?

2.What price will prevail in the market once this quota is in place?

Suppose that the government wishes to reduce the externality to efficient levels by levying a tax on leather production. How high would that tax need to be?

What is the resulting net price paid by buyers once the tax is in place?

How much leather is bought and sold with the tax in place?