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1. In a competitive constant cost industry, the marginal cost is GHS400and the private demand...

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Finance

1. In a competitive constant cost industry, the marginal cost is GHS400and the private demand function of individuals of a productwhose production generates negative externalitiesis P=6005Q. If the marginal external cost (MEC) function isMEC=10+Qwhere Q is the quantity of output produced. (a) Show that the market overproduces because of the negative externality. (b) Compute the level of per unit Pigouvian tax imposition that is required to force the production of socially optimal output. (c) Compute the marginal external costbefore and after theperunit taxand comment on your result. (d) Explain why there is an incentive to overproduce in (a) above.

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