Amanda and Hector each produce homemade ketchup. Amanda can make ketchup at a cost of materials and labor of $1.25 per bottle, and Hector can do the same at a cost of $1.80 per bottle. People get $4.00 of value from each bottle of ketchup, and every bottle made causes $2.50 of pollution-based damage to the people who live near Amanda and Hector.
a. Would the benevolent social planner like to see either Amanda or Hector make ketchup? Explain.
b. What is the size of the ideal tax that government could implement to reduce the pollution to the ideal amount?
c. If the tax was set at twice the level of the ideal amount, would either Amanda or Hector be discouraged from making ketchup?
d. If the tax was set at half of the ideal amount, would either Amanda or Hector be discouraged from making ketchup?

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The Answer of Amanda and Hector each produce homemade ketchup. Amanda can make ketchup at a cost of materials and labor of $1.25 per bottle, and Hector can do the same at a cost of $1.80 per bottle. People get $4.00 of value from each bottle of ketchup, and every bottle made causes $2.50 of pollution-based damage to the people who live near Amanda and Hector.
a. Would the benevolent social planner like to see either Amanda or Hector make ketchup? Explain.
b. What is the size of the ideal tax that government could implement to reduce the pollution to the ideal amount?
c. If the tax was set at twice the level of the ideal amount, would either Amanda or Hector be discouraged from making ketchup?
d. If the tax was set at half of the ideal amount, would either Amanda or Hector be discouraged from making ketchup?

Amanda and Hector Each Produce Homemade Ketchup