ECON 431 Midterm: ECON 431 Cal Poly SLO 2009 Midterm
Document Summary
Round off values to one decimal place where necessary. Consider a negative externality situation in which a firm emits air pollution that harms consumers breathing the air as a result of using a chemical solvent (x). The firm"s production function is y = f(x) = 10x 0. 2x2, where x is the amount of solvent the firm uses. The input price of solvent is v = and demand for the firm"s output is infinitely elastic at p= (that is, total benefit to consumers from consumption is b(y) = 10y. ) Z*, and optimal output level, y*: (5 points) calculate the optimal input tax on x (tx*) that corrects the negative externality situation. Verify that the input tax you calculated leads the firm to use x* units of solvent: (5 points) calculate the optimal pollution tax on z (tz*) that corrects the negative externality situation. Verify that the pollution tax you calculated leads the firm to emit z* units of air pollution.
