Question

Suppose that oil is perfectly divisible (you can buy non-integer quantities).

The marginal cost curve is given by MC=1.4Q + 1.
The demand curve is given by P =33 - 1.5Q, which gives MR=33-3Q

In the most efficient outcome (which perfectly competitive markets achieve), P=MC. Solve the equilibrium price and quantity in that case.

1. The most efficient equilibrium quantity is? Calculate the answer by read surrounding text. .
2. The most efficient equilibrium price is? Calculate the answer by read surrounding text. .

Now suppose that, for each unit of oil consumed, $4.02 worth of environmental damage is done. Solve the optimal Pigouvian tax (per unit) that would obtain the socially-efficient outcome where less oil is produced and sold.

3. The optimal tax per unit is $? Calculate the answer by read surrounding text. .

Answer 1

Thanks!