Question: Exercise 3: Monopoly and externalities (12 points) Consider a monopolist that pollutes. When a rm is a monopolist, it reduces its production so that it

Exercise 3: Monopoly and externalities (12 points) Consider a monopolist that pollutes. When a rm is a monopolist, it reduces its production so that it can increase price; although it sells fewer units, the higher price more than makes up for the reduced volume. Consumers lose, and total welfare is reduced, due to the higher price and lower quantity. The pollution problem, in contrast, is excess production. You are given the following information with regards to the market: Inverse Demand : P = 10 Q Total (Private) Cost : TC 2 2Q Marginal Revenue : MR 2 10 2Q Marginal Cost : M0 = 2

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