Chapter 10, Problem 1SPPA

To determine

To calculate:

The equilibrium quantity, price and marginal external cost generated without pollution control.

Answer to Problem 1SPPA

Without pollution control, equilibrium Output (Q_P) is 400, equilibrium Price (P_P) is 8 cents and marginal external cost (MEC) is 8 cents.

Explanation of Solution

An externality refers to the cost and benefits that the third-party bears and it has no control over it. However, externalities can be negative and positive. The externalities that cost to the third party are considered as negative externality while if it benefits the third party then it is considered as positive externalities.

The price, output, marginal private cost (MPC) and marginal external cost (MEC) schedules are given as follows:

Price (P)	Output (Q)	MPC	MEC	MSC
4	500	10	10	20
8	400	8	8	16
12	300	6	6	12
16	200	4	4	8
20	100	2	2	4
24	0	0	0	0

Without pollution control, the coal burning utility would take output and price decisions according to the following condition:

MB=MPC

Where

MB is marginal benefit,

MPC is marginal private cost.

The marginal benefit is equal to the output (demand). That is, coal burning utility would produce the output level where MB curve intersects MPC curve. Hence, without pollution control,

Equilibrium output (Q_P) is 400, equilibrium price (P_P) is 8 cents and marginal external cost (MEC) is 8 cents.

The diagram below shows the plot of marginal benefit/ demand (MB), marginal private cost (MPC) and marginal social cost (MSC) curve and the production under no pollution control (private optimum).

Economics Concept Introduction

Externalities:

Externality is the negative or positive effect of an action by an economic agent on another.

Marginal benefit:

Marginal benefit of an economic activity is the extra benefit received by undertaking an additional unit of that economic activity. It is also the demand curve.

Marginal cost:

Marginal cost of an economic activity is the extra cost incurred by undertaking an additional unit of that economic activity.

External cost:

When externality is negative, it is regarded as external cost.

Social cost:

Social cost is the sum of private cost and external cost.