(Q4) Explain carefully why a chemical plant polluting the atmosphere might generate a negative production externality. Suppose the chemical firm's cost function C is defined as Ce(C,X), where c is chemicals produced and x is air pollution from chemical production. Define what is meant by the marginal costs of producing chemicals and the marginal costs of abating air pollution. Assume the marginal costs of chemical production increase with chemical output, and marginal abatement costs decline with air pollution, and the chemical firm sells in a competitive market. Use the appropriate diagram to show where the chemical firm will maximize its profits. Explain why if the firm cuts back its output, its profit decreases and its abatement costs increase.

(Q4) Explain carefully why a chemical plant polluting the atmosphere might generate a negative production externality. Suppose the chemical firm's cost function C is defined as Ce(C,X), where c is chemicals produced and x is air pollution from chemical production. Define what is meant by the marginal costs of producing chemicals and the marginal costs of abating air pollution. Assume the marginal costs of chemical production increase with chemical output, and marginal abatement costs decline with air pollution, and the chemical firm sells in a competitive market. Use the appropriate diagram to show where the chemical firm will maximize its profits. Explain why if the firm cuts back its output, its profit decreases and its abatement costs increase.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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