Question: I. Externality and policies Consider a negative externality arising from a polluting livestock farm. Marginal damage (MD) indicates the extra pollution cost associated with the

I. Externality and policies

Consider a negative externality arising from a polluting livestock farm. Marginal damage (MD) indicates the extra pollution cost associated with the farm's production. Inverse supply curve: P=20+Q

Inverse demand curve: P=50-Q

MD=$10

- To correct the negative externality, the government can impose a Pigouvian tax. Compute the total amount of the tax on the farm in order to ensure the social equilibrium.

- Instead of the tax, suppose the government could provide a subsidy, $20 per output, to the farm not to pollute. Analyze the effect of the subsidy on price and output.

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