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

See similar textbooks

Similar questions

Consider a manufactured good whose production process generates pollution. The demand for the product is Q=100-3P. The market supply function is Q=P. The marginal external cost is MEC=2Q. What is the emissions tax that needs to be imposed to achieve the social optimum? Illustrate on graph What is the economic incidence of this emissions tax? In other words, what proportion of this tax will be paid by producers of this product and what proportion of the tax will be paid by consumers?
Externalities: Suppose the daily inverse demand curve for gasoline in Portland is given by P = $100 – Q, the MC = 1.5Q, and the EMC = 1.5Q. Q is measured in thousands of gallons of gasoline per day. a. Graph the demand, marginal cost, and external marginal cost functions. b. How many gallons will be consumed per day if gasoline consumers do not consider the EMC of gasoline? c. How many gallons of gasoline will be consumed per day if gasoline consumers consider the EMC.
The following graph shows the demand (marginal private benefits) and supply (marginal private costs) curves for a good. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Suppose that a negative externality arises as a result of the production of this good. Adjust the following graph by shifting one of the curves to reflect the presence of the negative externality. PRICE AND COST greater less The market output is greater QUANTITY Supply Demand than the socially optimal output. Demand Supply (?
Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $245 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for steel. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $245 per ton. The market equilibrium quantity is _______ tons of steel, but the socially optimal quantity of steel production is _______ tons. To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a ___subsidy or tax______ of ______ per ton of steel.
Consider two firms with the following marginal abatement costs (MAC) as a function of emissions (E): MAC_1 = 12-.5E_1 MAC_2 = 12-E_2, and assume marginal external damages (MED) from the aggregate emissions of both firms (E_Agg = E_1 + E_2) is: MED = (1/3)E_Agg. To achieve the socially efficient level of aggregate emissions (E*_Agg), the government institutes a per unit tax on emissions. The per- unit tax on emissions is $ Answer:
You are an industry analyst that specializes in an industry where the market inverse demand is P = 300 - 4Q. The external marginal cost of producing the product is MCExternal = 8Q, and the internal cost is MCInternal = 15Q.Instructions: Enter your responses rounded to the nearest two decimal places.a. What is the socially efficient level of output? unitsb. Given these costs and market demand, how much output would a competitive industry produce? unitsc. Given these costs and market demand, how much output would a monopolist produce? unitsd. Which of the following are actions the government could take to induce firms in this industry to produce the socially efficient level of output.Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click twice to empty the box.check all that apply Pollution taxes Nonrival consumption Pollution permits
The supply of fertilizer is described by the following equation: Qs= 3,000P where Qs is the supply per year and P is the price of fertilizer per ton. The demand for fertilizer is described by: Qd= 500,000 − 20,000P where Qd is tons of fertilizer demanded per year. The marginal external costs of $30 are associated with the production of each ton of fertilizer due to the pollution related to fertilizer production. explain your answers by showing your work. a) Assuming that fertilizer is sold in a competitive market, what is the market price?
Lecture: Externality - Pigou8. All-Leather is a tanning company located on Lake Michigan in Chicago. Its total cost functionis C(QA) = 125 + 8QA + 5QA2, where QA is leather production per week in thousands of pounds.a) If leather sells for $408 per thousand pounds, how much leather will All-Leather produce?How much profit does All-leather earn?Enjoy is a beverage company located on Lake Michigan near All-Leather in Chicago. Enjoy’sproduction of beverages is negatively affected by water pollution from All-Leather’s productionof leather. Enjoy’s total cost function to produce beverages isC(QE) = 10QE +3QE2 + 3QA2where QE is Enjoy’s weekly production of beverages, in thousandsof gallons and, as above, QA is All-Leather’s weekly production of leather.b) Is this an example of a pecuniary externality or a real externality? Explain.c) What is the extra cost to Enjoy from an additional thousand tons of leather production by AllLeather (i.e., the external marginal cost of an extra unit of QA…
In the market for a certain pesticide, the following equations represent the private demand and supply: Private Demand: QD = 160 - P Private Supply: QS = 4P The use of this pesticide has a negative externality that affects nearby ecosystems, which is not reflected in the market price. The external cost is estimated to be $5 per unit of pesticide. By how much is the pesticide overconsumed under perfect competition? A) 1 units B) 3 units C) 4 units D) 5 units E) none of the above
Consider two firms with the following marginal abatement costs (MAC) as a function of emissions (E): MAC_1 = 22 - 2E_1 MAC_2 = 10 - E_2, and assume marginal external damages (MED) from the aggregate emissions of both firms (E_Agg = E_1 + E_2) is: MED = .5E_Agg. To achieve the socially efficient level of aggregate emissions (E*_Agg), the government institutes a cap and trade policy and sets the cap equal to the socially efficient level of emissions (E*_Agg). If firm 2 is initially grandfathered 2 permits, it will buy ____ more permits. (Note: your answer can be positive or negative; if it is positive, the firm is buying additional permits; if it is negative, the firm sells permits. So, for example, an answer of -10 implies that the firm sells 10 permits)
Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of bolts imposes a constant external cost of $90 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $90 per ton. PRICE (Dollars per ton of bolts 600 540 480 420 360 300 240 180 120 60 0 0 C ☐ 1 O ☐ 2 O 0 3 4 QUANTITY (Tons of bolts) 0 The market equilibrium quantity is O ☐ 5 Supply (Private Cost) Demand (Private Value) 6 7 Social Cost (?) ▼ tons of bolts, but the socially optimal quantity of bolt production is To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a $ per ton of bolts. tons. of
Aside from greenhouse gas emissions [e.g., carbon dioxide (CO2)], vehicles emit pollutants such as nitrogen oxides (NOx), which contribute to the formation of ozone and acid rain, and carbon monoxide (CO), the ingestion of which reduces the flow of oxygen in the bloodstream and is particularly dangerous to persons with heart disease. Assume that the following equation describes these marginal external costs: EMC= 0.125Q Inverse Demand Function: MB = 180,000–QdMarginal Cost Function:MC = 0.25 Qs c.What is the social marginal cost function (SMC)? Graph this function along with the private marginal cost (label this PMC) and marginal benefit functions. d.Determine the socially efficient equilibrium price and quantity and denote them by Psocand Qsoc. Show your answer both graphically and mathematically. e.What is total surplus at this social optimum (Ps, Qs)? Calculate totalsurplus numerically as well as indicate the area on the graph that corresponds with totalsurplus.…