Problem 1.

The market for children's vaccine X is described by the following equations. Demand is given by Qd=100-P and supply is given by Qs=2P, where Q is measured in units of vaccine X and P is price in dollars per unit.

a. Find the equilibrium quantity and price. Calculate consumer surplus, producer surplus, and total surplus in this market.

b. Suppose an environmental study shows that the production of vaccine X generates environmental pollutants. The study further points out that each unit of vaccine X is associated with a health hazard valued at 2 dollars. Calculate the total cost of pollution when firms produce the amount you found in part a. What is the total surplus once the external costs are taken into account?

c. If the production of vaccine X was banned, would the society's welfare increase or decrease? By how much?

d. Suppose the government decides to impose a 4 dollar environmental tax on production of vaccine X. Calculate the new consumer surplus, producer surplus, and total surplus. Is society better off or worse off?