The production of steel causes air pollution. Assume that the damage done by this pollution can be quantified as $75 per ton of steel produced. The figure below shows the marginal private benefit and the marginal private cost of steel. MGdal Price ($) 6001 DWL 550 - MC,ocial 500 - DWL MC 'pvt 450- 400- 350 - 300- 250 - 200 150- Bov=MB pvt so 100 - 50 - 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Tons of steel (millions) reset a. This is a negative production externality b. Draw the marginal social cost of steel on the graph. Use the tool provided (MCsocial) and plot only the two endpoints across the range of output 0 - 120. c. Without any intervention into the market, how many million tons of steel are sold? 90 d. What is the efficient (or socially optimal) quantity of steel? 80 million tons. e. Draw the deadweight loss that arises if the government does not intervene in this market. Use the tool provided (DWL) to draw the deadweight loss. The value of the deadweight loss is $ million. f. A Pigouvian tax of $ 75 per ton would eliminate the deadweight loss.

The production of steel causes air pollution. Assume that the damage done by this pollution can be quantified as $75 per ton of steel produced. The figure below shows the marginal private benefit and the marginal private cost of steel. MGdal Price ($) 6001 DWL 550 - MC,ocial 500 - DWL MC 'pvt 450- 400- 350 - 300- 250 - 200 150- Bov=MB pvt so 100 - 50 - 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Tons of steel (millions) reset a. This is a negative production externality b. Draw the marginal social cost of steel on the graph. Use the tool provided (MCsocial) and plot only the two endpoints across the range of output 0 - 120. c. Without any intervention into the market, how many million tons of steel are sold? 90 d. What is the efficient (or socially optimal) quantity of steel? 80 million tons. e. Draw the deadweight loss that arises if the government does not intervene in this market. Use the tool provided (DWL) to draw the deadweight loss. The value of the deadweight loss is $ million. f. A Pigouvian tax of $ 75 per ton would eliminate the deadweight loss.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter12: Environmental Protection And Negative Externalities

Section: Chapter Questions

Problem 33CTQ: Is zero pollution possible under a marketable permits system? Why or why not?

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Question

100%

Please answer all sections a-e.

The production of steel causes air pollution. Assume that the damage done by this pollution can be quantified as $75 per ton of steel
produced. The figure below shows the marginal private benefit and the marginal private cost of steel.
MCocial
Price ($)
600-
DWL
550 -
MC
social
500 -
DWL
MC
pvt
450 -
400 -
350
300 -
250 -
200
=MB so
MB
pvt
150 -
100 -
50 -
10 20 30 40 50 60 70 80 90 100 110 120 130 140
Tons of steel (millions)
reset
a. This is a Inegative production externality
b. Draw the marginal social cost of steel on the graph. Use the tool provided (MCsocial) and plot only the two endpoints across the
range of output 0- 120.
c. Without any intervention into the market, how many million tons of steel are sold?
90
d. What is the efficient (or socially optimal) quantity of steel?
80 million tons.
e. Draw the deadweight loss that arises if the government does not intervene in this market. Use the tool provided (DWL) to draw the
deadweight loss.
The value of the deadweight loss is $
million.
f. A Pigouvian tax of $
75 per ton would eliminate the deadweight loss.

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