1. Suppose you work as research economist at the EPA. There are two firms that operate in a perfectly competitive marker. This implies that each has the same marginal benefit curve, which in this case is horizontal at MB= $100. Each of the firms, however, has a different marginal private cost schedule

MPC1=20+Q and MPC2=30+2Q

Each firm's production process creates externalities that are valued by society at $10 per unit output

a) Show that without government intervention, the firms' profit maximizing outputs are Q=80 for firm 1 and Q=35 for firm 2, and the market is $100

b) Now calculate that socially optimal level of output for each firm

c) Your boss knows that the firms are currently producing too much output an simply decides that all firms should cut their output by 15%. Show that this is an inefficient solution to this externality problem

2. Suppose a new submarine for the Navy costs $10 billlion. Half the populations (130 million peple) are willing to pay $100 each to have it, and the other half are willing to pay $30 each not to have it. Should it be built?