Consider the following supply and demand schedule for steel from Problem 1: Price per ton (S)...

 

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Consider the following supply and demand schedule for steel from Problem 1: Price per ton (S) Qd Qs . . . 20 320 20 40 300 60 60 280 100 80 100 120 260 240 220 140 180 220 140 160 180 200 180 160 260 300 340 Assume that the above supply and demand curves are linear between points (and do not extend beyond the first quadrant (positive prices, positive quantities). Pollution from steel production is estimated to create an external cost of $60 per ton. There are no taxes in these initial conditions. a. Now assume that the government decides to implement an optimal Pigouvian Tax so as to internalize this externality. What is the optimal level of this Pigouvian tax? (15 points) b. When the Pigouvian tax is implemented, indicate with a graph how much tax revenue will be collected. (15 points) Consider the following supply and demand schedule for steel from Problem 1: Price per ton (S) Qd Qs . . . 20 320 20 40 300 60 60 280 100 80 100 120 260 240 220 140 180 220 140 160 180 200 180 160 260 300 340 Assume that the above supply and demand curves are linear between points (and do not extend beyond the first quadrant (positive prices, positive quantities). Pollution from steel production is estimated to create an external cost of $60 per ton. There are no taxes in these initial conditions. a. Now assume that the government decides to implement an optimal Pigouvian Tax so as to internalize this externality. What is the optimal level of this Pigouvian tax? (15 points) b. When the Pigouvian tax is implemented, indicate with a graph how much tax revenue will be collected. (15 points)

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