ECON MICRO
5th Edition
ISBN: 9781337000536
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 17, Problem 2.4P
To determine
The net gain if the government fixes the price above the optimal level.
Concept Introduction:
The positive or negative consequences faced by an unrelated third party or parties due to the performance or undertaking of an economic activity are known as externalities. The cost of economic activity incurred by a third party or parties is known as negative externalities.
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3. The effect of negative externalities on the optimal quantity of consumption
Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative
externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $600. The
following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $600 per unit.
PRICE (Dollars per unit of electric cars)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
0
+
1
O
□
☐
O
2
3
4
5
QUANTITY (Units of electric cars)
The market equilibrium quantity is
☐ Supply
(Private Cost)
6
Demand
(Private Value)
7
Social Cost
(?)
units of electric cars, but the socially optimal quantity of electric car production is
To create an incentive for the firm to produce the socially optimal…
3. The effect of negative externalities on the optimal quantity of consumption
Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative
externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $210. The
following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $210 per unit
Table 10-3
Quantity
(Units)
Private Value
(Dollars)
Private Cost
(Dollars)
External Benefit
(Dollars)
1
22
12
10
2
20
15
10
3
18
18
10
4
16
21
10
5
14
24
10
6
12
27
10
Refer to Table 10-3. Taking into account private and external benefits, the total surplus to society at the socially efficient quantity is
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