3. The effect of negative externalities on the optimal quantityof consumptionConsider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externalityfor those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $240. The followinggraph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals.Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $240 per unit.800720640560480400PRICE (Dollars per unit of pharmaceuticals)32024016080°D""ㅁSupply(Private Cost)Demand(Private Value)001356QUANTITY (Units of pharmaceuticals)Social CostThe market equilibrium quantity isunits of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production isunits.To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose aper unit of pharmaceuticals.

Graph:Market equilibrium is at intersection of Demand and Supply, while optimal outcome is at…

Answered: 3. The effect of negative externalities…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Briefly discuss some ways the government could ensure a market with a positive externality could encourage production of the socially optimal output. 2. Do you believe higher education provides our economy with a positive externality? Why or why not? Do you believe the steps that the federal government takes to encourage the socially optimal amount of higher education be produced/consumed is appropriate? Too much? Too little? Why? (Use appropriate economic theory to support your position.)
Price of a movie ticket $14 11 B) 16 C) 18 D) 19 9 8 6 14 16 Supply D₁ = marginal private benefit D₂= marginal social benefit 18 19 Quantity of movie tickets (hundreds per day) Figure 1 illustrates the market for movie tickets during a pandemic, where the government has decided it needs to restrict the sale of tickets for social distancing purposes. The figure illustrates an externality in consumption from going to a movie theater because the cost of spreading the virus is borne by other people. The demand curve showing marginal private benefit includes the chance of spreading the virus by contracting it while inside a movie theater. Question 1. Refer to Figure 1. The efficient equilibrium quantity of movie tickets is hundred per day. A) 14
The graph shows the unregulated market for electricity. Suppose that at every quantity produced, the marginal external cost of electricity equals the marginal private cost of production. To show the market outcome, draw the following four items on the graph: 1. Draw a point to show the marginal social cost when the utility produces 500 kilowatts per day. Label it 1. 2. Draw the marginal social cost curve. Label it MSC . 3. Draw a point to show the electricity produced and its marginal social cost. Label it 2. 4. Draw a shape to show the deadweight loss created. Label it DWL . >>> Draw only the objects specified in the question.
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Use the following to answer questions 7-8: Figure: Positive Externalities and Production of Semiconductor Chips Price, marginal | social benefit of chip $55 50 45 40 35 30 25 20 15 10 100 200 300 400 500 600 700 800 900 Quantity of chips 7. (Figure: Positive Externalities and Production of Semiconductor Chips) If the marginal external benefit of producing a chip is $20, then the socially optimal quantity of chips is and the socially optimal price is A) 200; $20 B) 300; $25 C) 500; $35 D) 600; $40 8. (Figure: Positive Externalities and Production of Semiconductor Chips) If the socially optimal production of chips is 500, the government could achieve the socially optimal level of production by granting a Pigouvian subsidy of: A) $5. B) $10. C) $15.
3. The effect of negative externalities on the optimal quantityof consumption Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $280. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $280 per unit. PRICE (Dollars per unit of pharmaceuticals) 800 720 640 560 480 400 320 240 160 80 O 1 2 3 □ O O ㅁ 4 Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Units of pharmaceuticals) Social Cost ? The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. To create an incentive for the firm to produce the socially optimal…
Air pollution creates a negative externality—a cost suffered by a third party as a result of an economic transaction. A standard solution to a negative externality is a Pigouvian tax, a tax that raises the marginal private cost of pollution emissions to the level of the marginal social cost. The socially optimal quantity of pollution emissions is then determined by the intersection of the marginal private benefit, or demand, curve and the marginal social cost curve. The article notes that "putting a dollar value on the benefits of cleaner air has been difficult." Assuming this problem has been resolved, in the accompanying diagram, move the endpoints of line Smarginal social cost to show the marginal social cost curve. Then move the line labeled "Tax" to show the amount of the tax needed to limit emissions to the socially optimal level.
Draw a graph that models a positive externality in consumption (label and clearly explain graph) Explain: i) The difference between the competitive equilibrium quantity and the socially optimal level quantity. ii) A possible intervention to bring the competitive equilibrium quantity closer to the socially optimal quantity. iii) An example of a setting in which this type of externality might occur (explain clearly how/why this externality happens).
On graph Price 150,300,450 , 600,.................1500 Quantity 0,1,2,3,4,5...
Consider a manufactured good whose production process generates pollution. The demand for the product is Q=100-3P. The market supply function is Q=P. The marginal external cost is MEC=2Q. What is the emissions tax that needs to be imposed to achieve the social optimum? Illustrate on graph What is the economic incidence of this emissions tax? In other words, what proportion of this tax will be paid by producers of this product and what proportion of the tax will be paid by consumers?
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The effect of external costs on the efficient level Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of 5330 per ton. The foliowing graph shows the demand (private value) curve and the supply (private cost) curve for steel.

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