Reference no: EM13152907

Problem 1:
The marginal external cost associated with the emissions of sulfur dioxide is estimated to be $30 per pound of this chemical per year. Assume that each ton of steel produced per year results in 5 pounds of sulfur dioxide emissions. Suppose that the supply of steel is infinitely elastic at a price of $500 per ton. The current equilibrium output of steel produced by a competitive industry is 10,000 tons. 
a. Show how a corrective tax can be used to achieve efficiency. Predict the impact of the tax on the equilibrium price and quantity of steel. Explain how steel companies will react to the tax. Indicate the amount of tax revenue that will be collected. 
b. Discuss the political support for the tax. In your discussion, show the net gain in well-being possible from the tax and indicate which groups will gain and which groups will lose as a result of its imposition.

Problem 2:
Consider the market for education. The marginal social cost of education (MSC) and the marginal private benefit of education (MPB) are given by the following equations where Q is the number of units of education provided per year.
MSC = 10 + Q
MPB = 100 - Q
You are also told that each unit of education provides an external benefit to society of $10 per unit. This external benefit is currently not being internalized in the market. 
a. Given the MSC and MPB curves, what is the current number of education units being produced by the market?
b. Is the current level of market production for education the socially optimal amount of education? Explain your answer.
c. Given the market level of production, what is the dead-weight loss in this market?
d. Suppose that the external benefit is internalized in this market when the government provides a subsidy of $10 per educational unit to consumers. What will be the socially optimal amount of education to provide given this subsidy?