The pharmaceutical company Merck Inc. pays the government of Costa Rica (through the national Institute InBIO) money to conserve natural rain forest and to obtain exclusive plant specimens from this forest for their research. Suppose Merck bases the decision about what area x of forest to protect on the aim of maximizing profits. The marginal private benefit MB, the marginal external benefits MEB and the marginal costs MC of forest area r are given by: MB(x) = 10 – r MEB(r) 5 – 2 MC(x) (a) Represent the situation in a diagram and explain in economic terms why the exter- nality associated with forest conservation leads to market failure, i.e. to a market

The pharmaceutical company Merck Inc. pays the government of Costa Rica (through the national Institute InBIO) money to conserve natural rain forest and to obtain exclusive plant specimens from this forest for their research. Suppose Merck bases the decision about what area x of forest to protect on the aim of maximizing profits. The marginal private benefit MB, the marginal external benefits MEB and the marginal costs MC of forest area r are given by: MB(x) = 10 – r MEB(r) 5 – 2 MC(x) (a) Represent the situation in a diagram and explain in economic terms why the exter- nality associated with forest conservation leads to market failure, i.e. to a market

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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