Demand: P = 7 – 2Q    Supply:    P = 4 + Q

Where P is output price in $/bushel and Q is billions (1,000,000,000s) of bushels. Recall that this farm produces a negative externality of $1.5 per bushel.

Let’s look at a using a regulation as compared to the tax.

a. Graph the quota that yields the same quantity produced as the tax would have yielded.

b. Now, show why the producer prefers the regulation (Quota) to a tax, considering that they will be forced one way or another to address the externality. Focus on their revenue with a tax, as opposed to with the quota.

c. Provide two more reasons that producers might prefer to have a regulation to address the negative externalities associated with producing wheat. Include an example to describe what you mean for each reason.