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Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.

Soybeans are produced and sold in a perfectly competitive market. The fertilizers used in soybean production generate a negative externality by seeping liquid contaminants into local rivers.

(a) Draw a correctly labeled graph of the soybean market, and show each of the following.

(i) The marginal private cost, labeled MPC

(ii) The marginal social cost, labeled MSC

(iii) The marginal social benefit, labeled MSB

(iv) The market equilibrium quantity, labeled QC

(v) The socially optimal quantity, labeled QS

(vi) The area of the deadweight loss, shaded completely

(b) Assume the government sets a binding price floor such that the quantity demanded in the market is between QS and QC.

(i) What will happen to the quantity produced?

(ii) Will the price floor reduce the deadweight loss? Explain.

(c) Assume instead of a price floor, the government decides to impose a lump-sum tax. What will happen to the socially optimal quantity? Explain.

(d) Assume instead of a lump-sum tax, the government decides to impose a per-unit tax equal to the marginal external cost.

(i) On your graph in part (a), indicate the new market equilibrium quantity, labeled QN.

(ii) What will happen to the deadweight loss? Explain.

(e) If this market were a monopoly with identical cost conditions, would the monopoly’s profit-maximizing quantity be greater than, less than, or equal to QC?