(Solved): Suppose that a factory sells knickknacks. The inverse demand for the knickkacks is P= 810 - Qp/4 whi ...

Suppose that a factory sells knickknacks. The inverse demand for the knickkacks is P= 810 - Qp/4 while the inverse supply is P= Qs/5 + 27. The factory is near city A, and production creates an air pollutant. This pollutant is blown into a nearby public park that the citizens of city A like to frequent. Marginal dmages from pollutant are MD=54.

1. Suppose the government levies a Pigovian tax to mitigate damages from the externality. What is the size of the optimal pigovian tax? What is the DWL from the externatlity after the government implements the optimal tax?

2. Propose a Coasian/private market solution to this negative externality problem. In other words, explain how the factory and its neighbors could reach the socially optimal level of production without a quantity or price intervention by the government.