3. A factory owner is deciding how much quantity Q to produce. The marginal private cost of production to them is 2Q, and the marginal private benefit of production to them is 138 – Q. However, there is an external effect: producing each unit of output generates water pollution that causes $60 worth of harm to the surrounding community. a) What is the factory owner's optimal choice of output? What is the socially efficient amount of output? Why are these different? b) Why is there deadweight loss at the factory owner's optimal choice? Using a diagram of the situation, calculate the amount of deadweight loss. c) What size of Pigouvian tax or subsidy on each unit of production would induce the factory owner to choose the socially efficient amount of output? Explain your answer. d) Thinking about environmental externalities in general, what does it mean that the right' price for e.g. carbon emissions depends on the so-called 'discount rate' we choose?

3. A factory owner is deciding how much quantity Q to produce. The marginal private cost of production to them is 2Q, and the marginal private benefit of production to them is 138 – Q. However, there is an external effect: producing each unit of output generates water pollution that causes $60 worth of harm to the surrounding community. a) What is the factory owner's optimal choice of output? What is the socially efficient amount of output? Why are these different? b) Why is there deadweight loss at the factory owner's optimal choice? Using a diagram of the situation, calculate the amount of deadweight loss. c) What size of Pigouvian tax or subsidy on each unit of production would induce the factory owner to choose the socially efficient amount of output? Explain your answer. d) Thinking about environmental externalities in general, what does it mean that the right' price for e.g. carbon emissions depends on the so-called 'discount rate' we choose?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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question 3

3. A factory owner is deciding how much quantity Q to produce. The marginal private cost
of production to them is 2Q, and the marginal private benefit of production to them is
138 – Q. However, there is an external effect: producing each unit of output generates
water pollution that causes $60 worth of harm to the surrounding community.
a) What is the factory owner's optimal choice of output? What is the socially efficient
amount of output? Why are these different?
b) Why is there deadweight loss at the factory owner's optimal choice? Using a diagram
of the situation, calculate the amount of deadweight loss.
c) What size of Pigouvian tax or subsidy on each unit of production would induce the
factory owner to choose the socially efficient amount of output? Explain your answer.
d) Thinking about environmental externalities in general, what does it mean that the
'right' price for e.g. carbon emissions depends on the so-called 'discount rate' we
choose?

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