Consider a piece of land covered by old-growth forest which could potentially be cleared and converted to agricultural use. The marginal benefit MB, the marginal private costs MC and the marginal external costs MEC of converting an area r of land are: MB(r) 10 – z MC(r) 3 МЕС(г) (a) Represent the situation in a diagram and explain in economic terms why the ex- ternality associated with land conversion leads to market failure, i.e. to a market equilibrium that is not socially optimal. (b) Determine analytically (i) the equilibrium allocation that results from individual utility maximization, (ii) the socially optimal allocation that results from consider- ing the full social costs, and (iii) compare both allocations.

Consider a piece of land covered by old-growth forest which could potentially be cleared and converted to agricultural use. The marginal benefit MB, the marginal private costs MC and the marginal external costs MEC of converting an area r of land are: MB(r) 10 – z MC(r) 3 МЕС(г) (a) Represent the situation in a diagram and explain in economic terms why the ex- ternality associated with land conversion leads to market failure, i.e. to a market equilibrium that is not socially optimal. (b) Determine analytically (i) the equilibrium allocation that results from individual utility maximization, (ii) the socially optimal allocation that results from consider- ing the full social costs, and (iii) compare both allocations.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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