Question

Suppose a particular production process results in a large amount of pollution and the government decides...

Suppose a particular production process results in a large amount of pollution and the government decides to impose a tax to correct for this externality, such that the socially optimal output will be produced. The tax will have the effect of shifting the

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer: shifting the supply curve to the left from MPC0 to MPC1.

EXPLANATION:

In presence of negative externality of pollution, marginal social cost of production is sum of marginal private cost of production and marginal damage due to pollution. The firm considers only marginal private cost while taking decision of how much amount to produce. And as a result the firm produces at the intersection of marginal private cost MPC0 and MB, I.e.Q0.

But the socially optimal level of production should be at the intersection of marginal social cost MPS and MB.i.e. Q1.

This extra amount of production Q1Q0 can be reduced by imposing tax of AB amount. As a result marginal private cost curve will shift from MPC0 TO MPC1. This is also the supply curve of the firm. Now socially optimal level of production Q1 will be produced.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose the marginal cost for mineral water production in a small isolated country is 20 +...
Suppose the marginal cost for mineral water production in a small isolated country is 20 + Q, and the demand for mineral water is P = 80 – 2Q, where P is the dollar price and Q is the tons of mineral water produced. Suppose the processing procedure in mineral water production generates pollution, which incurs damage to the environment described by a marginal function of MEC = Q. (The externality does not directly harm producers or consumers.) Question: If...
Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative...
Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality, Select one: a. the supply curve would adequately reflect the marginal social cost of production. b. consumers will be required to pay a higher price for steel than they would have if the externality were internalized. c. the market equilibrium quantity will not be the socially optimal quantity. d. producers will produce less steel than...
Suppose that government officials have set an emissions tax to reduce pollution. Assume that the optimal...
Suppose that government officials have set an emissions tax to reduce pollution. Assume that the optimal tax would be $1,500, but government officials have set the tax at $500. At the equilibrium with the $500 tax: a. there will be too much pollution. b. the marginal social cost of pollution will be less than $500. c. the marginal social benefit of pollution will be less than $500. d. the marginal social benefit of pollution will be more than $500.
Suppose the production of a good results in negative externalities. If all costs are taken into...
Suppose the production of a good results in negative externalities. If all costs are taken into account, then a.output will occur at the socially optimal level. b.the price of the product will be higher than if all costs are not taken into account. c.more output will be produced than if all costs are not taken into account. d.a and b e.  a, b, and c
If the production of a good results in a positive externality, the government might be able...
If the production of a good results in a positive externality, the government might be able to improve economic efficiency in this market by eliminating private production of the good imposing a tax on private producers promoting the export of the surplus output initiating antitrust action granting a subsidy to private producers
In western Wyoming, natural gas production produces a significant amount of ozone emissions. On really cold...
In western Wyoming, natural gas production produces a significant amount of ozone emissions. On really cold days in the winter, temperature inversions trap the ozone near the ground, and the unusually high levels of ozone in the atmosphere cause significant health issues for residents a) Using a simple supply and demand diagram, model this negative externality associated with natural gas production. Be sure to show both the competitive and socially optimal equilibrium prices and output of natural gas. b) Using...
suppose that the government wants to reduce cigarette smoking. it decides it will impose a $3...
suppose that the government wants to reduce cigarette smoking. it decides it will impose a $3 per pack of cigarette tax. this tax will be ineffective because heavy smokers have demand curves that are: A. Relatively inelastic B. Relatively Elastic C. Perfectly Elastic D. what's a demand curve
Suppose the demand for paper is given by Qd = 360 – 4p and the industry...
Suppose the demand for paper is given by Qd = 360 – 4p and the industry marginal cost of production is given by Qs = 6p. In addition, the firm’s production imposes an externality with an associated marginal damage (MD) = 2. (a) What is the private market equilibrium price and quantity? Hint: Solve for the inverse demand and supply first. (b) What is the socially optimum equilibrium price and quantity? (c) What is the net cost of society of...
Consider the competitive market for wheat. Suppose the government suddenly decides to impose a binding production...
Consider the competitive market for wheat. Suppose the government suddenly decides to impose a binding production quota (possibly through a system of tradable licenses which it auctions to raise government revenue). We know that this will lower the equilibrium quantity produced and raise the price relative to the market equilibrium. How would you argue that new equilibrium is inefficient? Simply point out that since it is not a free market equilibrium, it must be inefficient. Point to transaction that is...
The production of paper involves an external cost of $2 per ream of paper produced. If...
The production of paper involves an external cost of $2 per ream of paper produced. If neither the firm nor consumers include the external cost in their consumption or production decisions, which of the following is true about the resulting equilibrium, relative to the quantity that would maximize social surplus? A. The quantity will be socially optimal. B. The quantity might be too high or too low, depending on demand. C. The quantity will be too high. D. The quantity...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT