The demand curve for agricultural fertilizer with a watershed can be represented by Q = 40
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Question:
The demand curve for agricultural fertilizer with a watershed can be represented by Q = 40 – 2P. The marginal private costs are MPC = 0.5Q. Water quality effects (costs) arising from the application of nitrates and phosphates within the watershed are $5 per unit (note – this means that the water quality effects increase total costs by $5 per unit of Q).
- Suppose the government places a tax on the energy sector that results in the socially optimal level of output (and price). Show graphically how much tax revenue will be collected.
- Who is affected more by the tax – those who demand agricultural fertilizer (farmers) or those who supply it (fertilizer industry)? Why?
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