A miracle drug that cures obesity is developed and produced competitively at a constant cost to producers of 10 cents per dose. The companies that produce the drug, however, discharge chemical wastes resulting from the production process into the nation’s rivers. The damage to the economy in terms of reduced commercial and recreational use of the water-ways is estimated to be 1 cent per dose. The social demand for the drug is Q = 1,000,000 – 10,000P, where Q indicates the number of doses produced and P is the price per dose measured in cents.
a. How much of the miracle drug is produced? At what price? Give both numerical and graphical answers.
b. An economist testifies before Congress that obesity cures are being overproduced and sold too cheaply. What price and quantity do you think the economist would advocate? What is she likely to estimate as the cost to the economy of the supposed overproduction? Give numerical and graphical answers.
c. The economist argues that a tax should be placed on every unit of output that is accompanied by a waste discharge. What size tax per unit of output would an efficiency seeking economist advocate? With this tax, what would the price and output be for the miracle drug? Give both numerical and graphical answers.