. The Canadian government is considering a new environmental policy framework that would address environmental externali

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. The Canadian government is considering a new environmental
policy framework that would address environmental externalities in
oilseed production. Your job is to advise the government on the
economic consequences of proposed policies.
A demand function for oilseeds has been estimated as 𝑃 = 20 −
1.4𝑄 and a supply function has been estimated as 𝑃 = 1 + 0.5𝑄.
Scientists and economists at Environment Canada have estimated that
there is a $1.50 negative environmental externality imposed at
every level of output through increased CO2 and contamination of
the watershed. The government has proposed a tax on production to
“internalise the externality”.
1. Draw the diagram for this market without the policy and solve
for all relevant Ps and Qs. Calculate producer surplus. (4
marks)
2. Modify your diagram to include the proposed Pigouvian tax
that would internalise the externality. Solve for, and label, all
relevant Ps and Qs. Calculate producer surplus under this policy.
Is there government revenue from this policy? If so, how much? (4
marks)