Figure 18P-6 shows the daily market for water skiing permits on El Dorado Lake. Suppose each skier (each permit) causes $4 of damage to the lake.

a. Draw the social benefit curve that accounts for the external cost of skiers, and draw the deadweight loss that occurs at the market equilibrium. What is the socially optimal level of water skiing? Calculate the deadweight loss if there is no government intervention in this market.

b. Suppose the government imposes an $8 tax on buyers of ski permits. Draw the after-tax demand curve. Is this tax too high or too low? Draw the deadweight loss associated with this tax.

c. Compared to no intervention, how does the tax affect total surplus?

Figure 18P-6:

Transcribed Image Text:

Price (S) 20 18 16 14 12 10 4. 0 10 20 30 40 50 60 70 80 90 100 Skiers per day 6,