Price of steel

p1

p2

0 Q2 Q1 QSTEEL

D = PMB = SMB

S=PMCSMC = PMC + MD

MD

QCIGARETTES

Price of cigarettes

0 Q2

D=PMB

Q1

p1

S=PMC=SMC

SMB=PMB-MD

MDp2

Q

Price

0 Q2

D = PMB = SMB

Q1

p1

S = PMC

SMC = PMC -EMB

EMB

p2

QSTEEL

Price of steel

0 Q2

D = PMB SMB

Q1

S = PMCSMC = PMC + MD

MD

p2

1 2

QSTEEL

Price of steel

0 Q2

D=PMB=SMB

Q1

S = PMCSMC = PMC + MD

MD

p2

Socially efficient frontier (i.e. social welfare is maximized).

a

b

c

d

e

f

Utility

Utility

QSTEEL

Price of steel

0 Q2

D = PMB = SMB

Q1

p1

S=PMC

SMC=PMC+MD

p2

S=PMC+tax

QR&D

Price of R&D

0 Q2

D = PMB = SMB

Q1

p1

S = PMC

SMC=PMC-EMB

p2

S = PMC – Sub

QR

PR

0

MD = SMB

R*

S=PMC=SMC

RFull

More pollution

More reduction

$100

QR

PR

0

MD=SMB

R*

PMCA + PMCB = SMC

PMCB PMCA

PMCB

PMCA

R*/2RARB

$100

QR

PR

0

MD = SMB

R1

PMC1

RFull

PMC2

R3R2

QR

PR

0

MD = SMB

R1

PMC1

RFull

PMC2

R3R2