The market for a particular chemical, called Negext, is described by the following equations. Demand is given by QD = 100 - 5P Supply is given by QS = 5P where Q is measured as units of Negext and P is price in dollars per unit. a. Find the equilibrium price and quantity. Compute consumer surplus, producer surplus, and total surplus in the market equilibrium. Hint: Recall that the area of a triangle is computed using the formula: 0.5 x base x height.b. For each unit of Negext produced, 4 units of pollution are emitted, and each unit of pollution imposes a cost on society of $1. Compute the total cost of pollution when the market for Negext is in equilibrium. What is total surplus from this market after taking into account the cost of pollution? c. Would banning Negext increase or decrease welfare? Why? d. Suppose that the government restricts emissions to 100 units of pollution. Graph the Negext market under this constraint. Find the new equilibrium price and quantity and show them on your graph. Compute how this policy affects consumer surplus, producer surplus, and the cost of pollution. Would you recommend this policy? Why? e. Suppose that instead of restricting pollution, the government imposes a tax on producers equal to $4 for each unit of chemical produced. f. Calculate the new equilibrium price and quantity, as well as consumer surplus, producer surplus, tax revenue, and the cost of pollution. What is total surplus now? Would you recommend this policy? Why? g. New research finds the social cost of pollution is really higher than $ 1. How would that change the optimal policy response? Is there some cost of pollution that would make it sensible to ban Negext? If so, what is it?
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