Suppose everyone has utility ( , ) = − 0.25 2, where C denotes (dollars of) consumption and is the average amount that everyone else pollutes. Supposing every unit of pollution you create saves you $1 of effort, what is the optimal Pigouvian tax on pollution? Hint: in equilibrium, optimal pollution maximizes − 0.25 2. Calculate the marginal external harm at optimal pollution level.
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