(Answered) The process of transforming iron ore into steel requires

Management Studies

The process of transforming iron ore into steel requires the extensive burning of coal, and thus creates air pollution. We are given the following information about the steel industry. Assume that it is perfectly competitive. The market (inverse) demand and supply for steel are

P_d = 20 - q_d;

P_s = ∑MC = 2 + q_s.

Further, the marginal pollution damage from steel production can be described by:

MEC = MD = 0.5q.

a. What are the equilibrium price and quantity when there is no correction for this externality?

b. What is the socially optimal quantity? What is the price at this quantity?

c. What is the value of the deadweight loss from not producing at the socially optimal quantity?

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