Now assume that the factory has the right to produce

Now assume that the factory has the right to produce using the robots and the town citizen’s do not have the property rights for clean air. There are three policies that can be implemented to reach an efficient outcome. 

Regulation, Tax and Enforced Compensation. Consider them in turn and answer the following questions with the diagram from above. The firm faces a price of $340 per phone. 

Regulation 

a) Where would the government cap production to if it were to regulate the market to reach an efficient outcome? 

b) What would the factory’s loss of profit be (show all calculations). 

c) What do the town citizens’ gain? 

Taxation 

d) What is the amount of the Pigouvian tax used to reach a pareto optimal outcome? 

e) What is the after tax price received by the factory? Enforcing compensation 

f) Explain how compensation will be paid to the towns’ citizens as a collective for their pollution. 

g) Calculate how much this compensation will be. Show all workings.