You are employed as a policy analyst by Agriculture and Agri-Food Canada (AAFC). The Canadian government is considering a new environmental policy framework that would address environmental externalities in oilseed production. Your job is to advise the government on the economic consequences of proposed policies. A demand function for oilseeds has been estimated as =201.4 and a supply function has been estimated as =1+0.5. Scientists and economists at Environment Canada have estimated that there is a $1.50 negative environmental externality imposed at every level of output through increased CO2 and contamination of the watershed. The government has proposed a tax on production to internalise the externality. 1. Draw the diagram for this market without the policy and solve for all relevant Ps and Qs. Calculate producer surplus. (4 marks) 2. Modify your diagram to include the proposed Pigouvian tax that would internalise the externality. Solve for, and label, all relevant Ps and Qs. Calculate producer surplus under this policy. Is there government revenue from this policy? If so, how much? (4 marks) 3. Some dissenting scientists at Environment Canada disagree with the estimate of $1.50 for the environmental externality. They believe that the incidence of the externality is not constant across different levels of production; instead the size of the externality is proportional to the level of output. That is, the larger is the output, the larger is the externality. Their research suggests that the true social cost of cereal production diverges from private costs at every level of production by an amount equal to ten percent of production (note: ten percent, not ten percentage points). The government would like to know the economic effects of implementing a tax to internalise the externality in this case. Draw the diagram for this market and policy. Solve for all relevant Ps and Qs. Calculate producer surplus. (6 marks) 4. The government is also considering a cap and trade system that would restrict production with a quota. The proposed quota would limit production to 9.5 units. Draw the diagram for this market and policy. Solve for all relevant Ps and Qs. Calculate producer surplus. (4 marks) How would the welfare of producers be affected by the governments decision to grant production quotas to existing producers versus competitively auctioning production quotas (note: you dont have to solve this numerically, just provide a short explanation of the difference). (3 marks)