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# The excess burden

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Q1) Demand for milk is Q=1000-5p
long run supply function for milk is Q=4p-80. if government's climate change policy is based on polluters pays tax and it decides to tax milk.
a)how will this tax affect equilibrium in the milk market?
b)how would the burden be shared between buyers and sellers of milk?
c)what is the excess burden of this tax?
Q2) A firm in a perfectly competitive industry has invented and patented a new process for making a plastic product q. The new process lowers the firm's average cost curve, meaning that this firm alone can earn real economic profit in the long run.
a)if the market price for q is \$20 per unit and the firm's marginal cost is given by MC=0.4q, where q is the daily production for the firm, what will the firm's daily output be?
b) suppose that government finds that the new process pollutes the air and estimates that the marginal external cost of production is MEC=0.5q. If the market price is still \$20, what is the socially optimal level of production for the firm? what should the rate of a government imposed tax be in order to bring about this optimal level of production?
c) need a labelled graph.
Q3) Two groups of land users contribute to the pollution of a lake. Both dairy farmers (Group D) and sheep farmers (Group S) use nitrogen to fertilise their pasture. Local government has decided to implement a system of tradable rights to limit the influx of nitrogen into the lake. Government will issue 100 pollution permits. One permit equals 1 tonne. Their respective demand (in t) functions for nitrogen polluting rights are D(d)=100-p and D(s)=20-2p
a) Assume that the price of permits is zero and determine what the status quo level of nitrogen pollution is
b) describe two approaches to allocating the initial entitlements. Comment briefly on the relative merits of each.
c)Assume that each group gets 50 permits (i.e 50 tonnes each). Assuming zero transaction costs, describe post-trade equilibrium quantity and permit price.