Natural gas for a typical residence has a monthly demand (in MMBtus) of D(P)=12-0.2P. The market price of natural gas is $4 per MMBtu, and natural gas has an external cost from CO2 emissions of $2.60 per MMBtu^3. Assume natural gas is competitively supplied.
1. Calculate the market equilibrium price and quantity of natural gas.
2. Calculate the social benefit of the market equilibrium (i.e. consumer surplus plus consumer surplus minus the external cost)
3. How much natural gas should be used? (i.e. calculate the socially efficient quantity of natural gas)
4. Calculate the deadweight loss of the market equilibrium. Illustrate on a graph.
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