Suppose that the inverse demand curve for paper is P = 200 - Q. The private marginal cost is MCp = 80 + Q and the marginal harm from gunk is MCg = Q.
a. What is the unregulated competitive equilibrium?
b. What is the social optimum? What specific tax (per unit of output or gunk) results in the social optimum?
c. What is the unregulated monopoly equilibrium?
d. How would you optimally regulate the monopoly? What is the resulting equilibrium?