1. Consider a firm that manufactures dyed textiles. The firm incurs a marginal cost of MC 2Q Suppose that for every textile produced, there is an externality cost of 12 (from dyes being leaked into the water). So the true social marginal cost of widget production is MC = 2Q+12. Imagine that the (a) Assuming this is a perfectly competitive market, write out the equation for the firm’s supply (b) Calculate the equilibrium price and quantity. Assuming there was no externality cost, what are demand curve for textiles is given by Q 30 – P curve. Draw the supply and demand curves on a graph the consumer surplus and producer surplus? (c) Now, keeping in mind that there is also an externality cost, calculate the total surplus. Hint total surplus is CS PS – Exterality Cost. In this problem, externality cost is quite easy to you don’t need to look for it on the graph. Just think about how much extra it costs society if any units are produced.] (d) Now imagine the firm was taking the externality into account. What would its supply curve be? Draw the supply and demand curves, calculate the equilibrium price & quantity, and the total surplus (e) Finally, imagine that the government taxes consumers $12 per widget purchased. What does the demand curve become Assume fms do not take the externality into account. Show that the equilibrium quantity will now be the same as in part (e) (f) Now consider an alternate scenario. Everything remains the same in the problem as described above, except the externality cost. Instead of an externality cost, there is an externality benefit Strangely enough, each textile produced results in an externality benefit of 12. In other words each textile produced helps purify the water supply. If firms don’t take this benefit into account, they will now produce too little relative to the optimal level. Explain why (in words)