1. (50 points) Consider a factory that generates 5 tons of toxic waste. The factory chooses between burying the waste on site or paying for recycling. These decisions do not affect output. Burying a ton of waste does not cost the firm anything and given the nature of the production process and the recycling industry, the marginal cost of recycling r tons is given by: MCR (r) = 2r Toxic waste buried on site leaks into the water reserve that supplies a city. The estimated marginal health damages from burying t tons is given by: MEC, (t) = 4. In this problem, you can think of buried tons of waste (t) as "emissions" and the amount of recycling (r) as "abatement." a. Write down the marginal benefit of waste-burying as a function of quantity of waste buried (t). [i.e. MBT (t)]. (Hint: while converting MCR into MBT, r = T - t where T = 5). Draw the marginal benefit and social marginal cost curve for waste-burying on a graph with quantity of waste buried on the horizontal axis and $ per ton on the vertical axis. b. What is the private equilibrium outcome? i.e. How many tons of waste does the firm choose to bury? c. How many tons of waste would the social planner recycle to achieve efficiency? i.e. what is the socially efficient quantity of waste buried? d. Suppose a regulator wants to impose a tax on burying waste. What should the tax be, assuming it is a flat tax? e. Calculate the following: i. ii. iii. iv. The change in the firm's surplus as a result of the tax The change in the water drinkers' surplus as a result of the tax Tax revenue Net gain associated with the tax