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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5) Suppose:
i) the price of gasoline is $2 per gallon
ii) current consumption is 400 (million) gallons per day
iii) the elasticity of demand is -0.8
iv) retail provision of gasoline may be approximated as a constant cost industry
v) there is an external cost of $0.5 per gallon of gas.
Calculate deadweight loss associated with the externality. Draw a figure to illustrate.
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
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Similar questions
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- 7. In the figure below, which area is the efficiency loss from a negative externality? a) abc b) cde c) cef d) aef e) None of the above is correct. Price of cement 0 B AL D Q Marginal social cost Marginal private cost D Quantity of cementarrow_forwardDescribe 5 five negative externalities arising from the consumption and disposal of plastic bottlesarrow_forward7) A Detroit factory is polluting more than the socially optimal amount. The city government then imposes a lump sum tax on the business, but the business didn't change how much they were polluting. Explain what was wrong with the city's decision.arrow_forward
- (Table: The Marginal Social Cost of Batteries) The accompanying table lists several price (P) and quantity (QS) values along the market supply curve for batteries. Because batteries generate toxic wastes, there is an external cost associated with thẻir production. The marginal external cost is estimated to be $10. The marginal social cost would then be indicated by the values in the column labeled: Table: The Marginal Social Cost of Batteries Quantity supplied (Qs) 5.00 Price (P) MSC1 MSC2 MSC3 MSC4 $20 $2.00 $10 $30 $20 26 7.00 2.60 16 36 26 28 7.67 2.80 18 38 28 32 9.00 3.20 22 42 32 36 10.33 3.60 26 46 36 38 11.00 3.80 28 48 38 OA. MSC1. B. MSC2. O C. MSC3. OD. MSC4.arrow_forward1) People who live on the edge of small lakes sometimes have break walls constructed on their property by the shore. A break wall is typically a vertical column of wood or concrete that prevents high water levels from covering part of the owner's property, reducing the size of the beach, and/or eroding the yard. However, several communities have restricted property owners from building break walls. What is one reason for that? Hint: Think about potential externalities of building a break wall. (Short answer) 2)When are quantity restrictions not the same as price restrictions (via taxes)? Describe one situation in which the government would be better off imposing quantity restrictions than setting a tax and explain why quantity restrictions are better in that case. (Short answer)arrow_forward5arrow_forward
- (Figure: Nail Polish Externalities) In the figure, Sp (MPC) represents the private supply curve of a particular type of nail polish, whose manufacture is associated with the release of toxic chemicals into the atmosphere. SS (MSC) includes the costs of that toxicity borne by others. What area represents the total externality cost of this nail polish? a) abdc b) abef c) defc d) the total externality cost is unknown. (the answer is NOT b)arrow_forwardPRICE (Dollars perton) 90 81 72 63 54 45 30 27 18 9 0 0 + I 40 60 80 100 120 140 160 180 200 QUANTITY (Millions of tons) 20 40 Demand Graph Input Tool Daily Demand for Pollution Rights Price (Dollars per ton) Quantity Demanded (Millions of tons) 9 180 Suppose the government has determined that the socially optimal quantity of chemical pollution is 140 million tons per day. Corrective taxes Tradable permits One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) of S of chemicals emitted will achieve the desired level of pollution. (?) Now suppose the U.S. government does not know the demand curve for pollution and, therefore, cannot determine the optimal tax to achieve the desired level of pollution. Instead, it auctions off tradable pollution permits. Each permit entitles its owner to emit one ton of chemicals per day. To achieve the socially optimal quantity of pollution, the government auctions off 140…arrow_forwardWhat externality problem do you expect in the market for plastic bags? How does the government correct the inefficiency of the market? Explain in detail with diagramarrow_forward
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