9781118041581

revenue is given by R t(Q u), and the firms’ total pollution

related costs are t(Q u) 5u^2 (cell D19). Find the optimal output,

tax, and cleanup. (Hint:Maximize total benefits subject to cell E19

equaling zero. Remember that the firms will reduce pollution up to

the point that the tax/unit equals the MC of cleaning up an extra unit

and note that MC 10u.) Explain your results.

Suggested References

The following references provide advanced discussions of the theory and practice of regulation.

Hahn, R. W., and P. C. Tetlock. “Has Economic Analysis Improved Regulatory Decisions?” Journal

of Economic Perspectives(Winter 2008): 67–84.

“Symposium on Antitrust Policy.” Journal of Economic Perspectives (Fall 2003): 3–50.

“Symposium on the Microsoft Case.” Journal of Economic Perspectives(Spring 2001): 25–80.

Viscusi, W. K., J. M. Vernon, and J. E. Harrington. The Economics of Regulation and Antitrust.Cam-

bridge, MA: MIT Press, 2005.

494 Chapter 11 Regulation, Public Goods, and Benefit-Cost Analysis

AB C D E F G H

1

2 COPING WITH AN EXTERNALITY

3

4 Market Demand LMC LAC MCEXT

5 P  500 10Q 150 100

6

7

8 Quantity Tax Clean Up (u) Price

9

10 10 0 0 400

11

12

13 Con Surp Net Profit Govt Rev External Cost Total Benefit

14

15 500 2,500 0 1,000 2,000

16

17 Gross Profit taxclnup cost tax MCu

18

19 2,500 0 0

20

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