A microbrewery operates next to the Bushville Lake and uses water from the lake during production. The marginal cost of beer production is: MC = 8 + 2Q where Q is the quantity of beer produced (keg). The brewery sells its output at a market price of $40/keg. Because the industry is perfectly competitive, the brewery’s action does not affect the market price. The Bushville Lake is also used for kayaking and recreational fishing, but pollution from the brewery reduces the quantity of fish available and makes the lake very unpleasant. Each keg of beer produced emits a pound of pollutants that causes a loss of recreation opportunities worth $3. a) How much beer will be produced? b) What is the efficient level of beer production? If the government used a Pigouvian tax to achieve this goal, what would the tax be?
A microbrewery operates next to the Bushville Lake and uses water from the lake during production. The marginal cost of beer production is:
MC = 8 + 2Q
where Q is the quantity of beer produced (keg). The brewery sells its output at a market price of $40/keg. Because the industry is
a) How much beer will be produced?
b) What is the efficient level of beer production? If the government used a Pigouvian tax to achieve this goal, what would the tax be?
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