Question 1: Negative Externalities A perfectly competitive industry produces a good with inverse demand curve P = 200 Q and inverse supply curve of P =20 + Q. In addition, the production of the good imposes costs on a neighboring town where marginal external costs are given by P = Q. (a) What is the competitive equilibrium? (b) What is the welfare maximizing level of output? (c) Draw the relevant graph, clearly labeling the inverse demand curve, marginal private cost curve, marginal social cost curve, the competitive equilibrium, the welfare maximizing outcome and the deadweight loss in the unregulated market. (d) Calculate the amount of deadweight loss. (e) What is the welfare-maximizing Pigouvian tax? (f) Draw the relevant graph for part (e), clearly labeling the inverse demand curve, marginal private cost curve, marginal social cost curve, and show how the relevant curve will shift once the Pigouvian tax in part (e) is enacted. (g) Now, suppose that the firm is produced by a monopolist rather than firms in a perfectly competitive industry. How much will the monopolist choose to produce? (h) What would be the optimal tax to levy on the monopolist if the government wanted to maximize welfare? Briefly explain why your answer to part (h) is different than your answer to part (e)