Question

QUESTIONS 6A to 6C

Questions 6A to 6C are based on the table below, which describes the profit of a plastic- producing firm, and the external cost it imposes on consumers nearby who suffer from the air pollution.

Units of Plastic Produced	Marginal Profit (MR-MC)	Marginal External Cost (on consumers)	Marginal Social Profit (MSB-MSC)
1	45	6	39
2	33	6	27
3	20	11	9
4	10	11	-1
5	1	11	-10

(6A) How much will the plastic firm choose to produce if it could freely choose for itself? What is the socially optimal amount?

(6B) Assume the government now wishes to impose a Pigouvian tax. Specify the amount of tax.

(6C) Assume now that the government wishes instead to utilise a Coase solution. Assume the government gives the right to use the air entirely to the plastic firm, hence it can continue its production. Describe what will consequently occur in terms of the units produced. How much

Answer 1

6(a).

the firm will chose to produce 1 quantity of plastic because :

The marginal profit is highest.

The cost is lowest.

The social profit is also the highest

The socially optimal amoumt will also be equal to 1 unit because , producing less plastic is good for a healthy environment.

6.b.).

Pigouvian tax is imposed by the government on the businesses whose production creates a side effect on the society.

Amount of tax would be such that the production of plastic could be kept as minimum as possible.

6.c)

If the government allows to produce as much plastic as they want and gives the right of air to firm, then there would be a massive production of plastic in the society.

The firm will increase the production of plastic till the firm reaches to its maximum profits ..

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