Suppose the steel producing firms in the US are located along waterways. The industry is represented by the supply curve: Q_s=.8P where Q_s is tons of steel per month and P is the price per ton.  The market demand curve is Q_d=1085-.75P. 

a.       Calculate the market equilibrium price and quantity (assume the industry is perfectly competitive).

b.       At the equilibrium, do we know that P=PMC=PMB?  Explain.  Do we know if this is socially efficient?

Now, suppose the production of steel also produces a waste product (sludge) that the steel producers emit into the river.  The sludge is toxic to fish, and each ton of steel produces enough sludge to kill $50 worth of fish.  The marginal damage of steel production: MD=$50/ton.

c.       Calculate the socially efficient quantity of steel production.

d.       Identify and calculate the deadweight loss generated by the market equilibrium in part a.

e.       Does the socially efficient output of steel include some external cost (some dead fish)?

f.       Discuss the costs and benefits of the various social policies that could be implemented to achieve social efficiency.