Question

Assume a project to extract oil off the coast of Ghana. Ghana will face health problems associated to water pollution caused by oil drilling activities. The demand for oil is Q^d=45 – P. The supply is MPC=15+ Q^s (MPC are marginal private costs). A health study conducted for a related project in Nigeria found that the external cost associated to water pollution from oil drilling is: MEC =6+ 4Q^s (MEC are marginal external costs)

a) Estimate the competitive equilibrium price and quantity when external costs are not included

b) Estimate the competitive equilibrium price and quantity when external costs are taken into account.

c) What is the appropriate price to use for financial analysis of the project?

d) What is the appropriate price to use for the economic analysis?

e) What will be the total cost associated with the health problem if oil is produced at the competitive equilibrium level

Answer 1