## Problem 1 Suppose the inverse supply and demand functions in the borogove market are given by the following functions: Demand: P = 150 – 6Q + 0.02Q2 for 0 < Q < 25 Supply: P = 50 + 0.75Q + 0.02Q2 for 0 < Q < 25 where Q is the units of borogove produced or consumed per year, and P is dollars/unit.

Problem 1

Suppose the inverse supply and demand functions in the borogove market are given by the following functions:

Demand: P = 150 – 6Q + 0.02Q2 for 0 < Q < 25 Supply: P = 50 + 0.75Q + 0.02Q2 for 0 < Q < 25 where Q is the units of borogove produced or consumed per year, and P is dollars/unit. Suppose also that the production of borogove emits pollution. The externality of the pollution associated with each additional borogove has rising marginal damages such that: MED = 0.12Q with Q defined as before. Assume that the rate of emissions per unit of borogove is fixed (or invariable). a. What level of borogove will the unregulated market produce? What will be the price of borogove in the unregulated market? b. What is the socially optimal level of borogove production? c. What is the potential net social gain from correcting the pollution externality and producing borogove at the optimal level? d. Suppose the legislature passes a regulation that shifts borogove production to the socially optimal level. What is the net present value of correcting the externality over the first twenty years of the program? Use a social discount rate of 5%.