Question 1 Second Best (50 points) Use the following information to answer the questions below. Inverse demand: p=20q Average Cost =MC=C Pollution damages: D=q+21q2 where (>0) A. (5) What are marginal damages? B. (15) For a competitive industry, find the socially optimal production level and the tax necessary to achieve that level. C. (5) Building on your result in (B), what must be true for firms to produce? D. (15) For parts D \& E only: MC=4,=2. If the producer is a monopolist, what is the socially optimal production level and the tax necessary to achieve that level? E. (10) Has the monopolist's market power increased (use the Lerner Index as a proxy for market power)? Is the tax a "second best" policy? Question 1 Second Best (50 points) Use the following information to answer the questions below. Inverse demand: p=20q Average Cost =MC=C Pollution damages: D=q+21q2 where (>0) A. (5) What are marginal damages? B. (15) For a competitive industry, find the socially optimal production level and the tax necessary to achieve that level. C. (5) Building on your result in (B), what must be true for firms to produce? D. (15) For parts D \& E only: MC=4,=2. If the producer is a monopolist, what is the socially optimal production level and the tax necessary to achieve that level? E. (10) Has the monopolist's market power increased (use the Lerner Index as a proxy for market power)? Is the tax a "second best" policy