A set of perfectly competitive firms produce leather shoes. For each pair of shoes made using current production techniques, 1 pound of water pollution (WP) is released into the ocean, and the social cost of that pollution is $c per pound. When pollution is unregulated, the private cost of pollution is $0. Required:
a. Graph the supply and demand for shoes and indicate the unregulated market output and price, and the socially optimal output.
b. On the graph, indicate the level of a tax on shoes that would result in the socially optimal level of shoe production.
c. Consider the production of a given number of shoes, Q, by one of these firms. Suppose that there is a possible pollution-reducing set of machines, K, which cost $1 per machine. When K =0, 1 pound of pollution is produced, and with higher levels of K, less WP is produced. What is the cost-minimizing choice of WP and K when pollution is unregulated? Explain; a diagram will be useful.