The supply and demand curves for canned fruit as: QD = 3600 - 400P, QS = -600 + 400P, per-unit tax=$2.5. After a long investigation led by the Ministry of the Environment of this country, it becomes apparent that the fruit-canning process generates waste products. Specifically, the marginal external cost of such waste has been estimated as: MEC =Q/400 (dollars/case), and Q represents cases of canned fruit produced per day.

a. Determine the marginal social cost of producing canned fruit. Draw a new graph that

includes the original market demand and supply curves, the marginal external cost, the

marginal social cost and the pre-tax equilibrium price and output levels.

b. Find the socially optimal levels of price and output and show them in the graph of part a.

Are these socially optimal values different from the pre-tax equilibrium? If yes, why so?

c. Determine the per-unit tax that would result in a competitive market producing the

socially efficient output. Do you really need to calculate such tax or can you make use of

some previous results of this homework? Explain. Would such tax generate a DWL or

would it rather eliminate it?