Given the following information: Initially, a perfectly competitive market for a product is in equilibrium, with an upward-sloping straight-line market supply curve, a downward-sloping straight-line market demand curve, and a market price of $30 per unit. Consumption of this product causes pollution. Initially, the marginal external cost of the pollution caused by consuming the product is $9 per unit. There is no government policy toward the externality. The government then mandates a shift to a new product version, and all firms adopt and produce the latest version. Consumers view the new product version as equally as good as the initial product version. Consumption of the new version of the product causes less pollution, and the marginal external cost decreases by $3 per unit. For each firm, production of the new product version does not change fixed cost, but it does increase average variable cost by $3 per unit. If necessary, the market adjusts to a new equilibrium. There is no other government policy toward the externality. You are asked to compare the initial market situation before the new version is mandated with the new market situation after the shift to the new product version. Statement to evaluate: As the result of the mandated shift to the new version of the product, the total net surplus for the country from producing and consuming this product increases. (That is, the net benefit to the country from producing and consuming this product increases.)
Given the following information: Initially, a
The government then mandates a shift to a new product version, and all firms adopt and produce the latest version. Consumers view the new product version as equally as good as the initial product version. Consumption of the new version of the product causes less pollution, and the marginal external cost decreases by $3 per unit. For each firm, production of the new product version does not change fixed cost, but it does increase
If necessary, the market adjusts to a new equilibrium. There is no other government policy toward the externality.
You are asked to compare the initial market situation before the new version is mandated with the new market situation after the shift to the new product version.
Statement to evaluate: As the result of the mandated shift to the new version of the product, the total net surplus for the country from producing and consuming this product increases. (That is, the net benefit to the country from producing and consuming this product increases.)
[In your answer, you must draw and refer to a graph as part of your explanation.]
[In your answer, you can ignore any distinction between short-run equilibrium and long-run equilibrium—ignoring the distinction is what we did for this topic in the course.]
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