Suppose that the demand for gold is given by the equation P = 150− 3Q and the marginal private costs of gold production is given by the equation MPC = 7Q while the marginal environmental degradation costs associated with gold production which are borne by the gold producers are given by the equation MEC = 5Q (a) What quantity of gold will be produced in a free unregulated market? (b) What quantity of gold should be produced if the goal is to obtain an efficient allocation of gold? Explain. (c) What level of Pigovian tax, applied to each unit of gold production, would assure that the amount of gold produced would equal the efficient allocation? (d) Use your answers to (a) and (b) above to explain and illustrate, what generally happens to the allocation of commodities that cause pollution externalities (gold in this case)
Suppose that the demand for gold is given by the equation P = 150− 3Q and the marginal private costs of gold production is given by the equation MPC = 7Q while the marginal environmental degradation costs associated with gold production which are borne by the gold producers are given by the equation MEC = 5Q (a) What quantity of gold will be produced in a free unregulated market? (b) What quantity of gold should be produced if the goal is to obtain an efficient allocation of gold? Explain. (c) What level of Pigovian tax, applied to each unit of gold production, would assure that the amount of gold produced would equal the efficient allocation? (d) Use your answers to (a) and (b) above to explain and illustrate, what generally happens to the allocation of commodities that cause pollution externalities (gold in this case)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose that the demand for gold is given by the equation P = 150− 3Q and the marginal private costs of gold production is given by the equation MPC = 7Q while the marginal environmental degradation costs associated with gold production which are borne by the gold producers are given by the equation MEC = 5Q (a) What quantity of gold will be produced in a free unregulated market?
(b) What quantity of gold should be produced if the goal is to obtain an efficient allocation of gold? Explain.
(c) What level of Pigovian tax, applied to each unit of gold production, would assure that the amount of gold produced would equal the efficient allocation?
(d) Use your answers to (a) and (b) above to explain and illustrate, what generally happens to the allocation of commodities that cause pollution externalities (gold in this case)
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