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Externalities: On Aloha Island, the demand of widgets is given by P=30-Q and thesupply for widgets is given by P=Q. It is estimated that for every widget that’sproduced, the factory creates enough pollution to cost the local fishing industry$2.
a. What is the market equilibrium without regulation?
b. What is the equation for the Marginal Social Cost curve? Use this to figureout what the socially optimal amount of widgets is. Is the socially optimal thesame amount as you found in part (a)?
c. The government could achieve the outcome in (b) by charging a “pollutiontax” on each widget produced equal to $2. What would be the deadweight loss if the government did not do this? (Hint: draw a graph with the unregu-ated market supply curve, the MSC, and the demand curve. Use your notes toidentify the DWL on this graph.)
d. Graph the demand and marginal cost for the psychic market.
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