Suppose that the inverse demand curve for paper P = 218 - Q, the private marginal cost is MCp = 92 + Q and the marginal harm from gunk is MCg = Q.

1. What is the unregulated competitive equilibrium price and quantity? Let this equilibrium be E1 .
2. What is the socially optimum price and quantity? Let this equilibrium be E2.
3. In a clearly labeled graph, plot demand, private marginal cost, social marginal cost and marginal harm from gunk, and E1 and E1.
4. Show in the previous graph and calculate the DWL from externalities.
5. What tax would result in the social optimum?
6. Illustrate your answer in part 5) with a new graph.
7. With the tax, what is the DWL and how does it compare to the DWL in 4)?