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Chapter 12: Q.4 (page 293)

Table 12.5 provides the supply and demand conditions for a manufacturing firm. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the firm is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.

Short Answer

Expert verified

Without social cost: 440

With social cost:410

Step by step solution

01

Social cost : 

Social costs are costs that comprise both private costs spent by businesses and additional external costs imposed by third persons who are not involved in the manufacturing process.

02

Explanation :

The price would be $15and the quantity would be 440in the initial equilibrium before the external social cost of pollution. Once the supply curve overlaps the demand curve, it is determined. So when additional external expense of pollution is included in, production becomes more expensive, and the supply curve swings upward. The new equilibrium would be calculated using a price of $30and a quantity of 410as inputs. As a response of the price increase, the supply curve would eventually move to the left.

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Most popular questions from this chapter

Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?

What is a marketable permit and what incentive does it provide for a firm to account for external costs?

For each of your answers to Exercise 12.2, will equilibrium price rise or fall or stay the same?

Suppose a city releases 16million gallons of raw sewage into a nearby lake. Table 12.8shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)


Total Cost (in thousands of

dollars)


Total Benefits (in thousands of


dollars)


16 million

gallons


Current situation
Current situation

12 million

gallons


50800
8 million gallons
1501300
4 million gallons
5001650
0 gallons
12001900

a. Using the information in Table 12.8, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs, and Industry Structure if you need a refresher on how to calculate marginal costs.

b. What is the optimal level of sewage for this city?

c. Why not just pass a law that firms can emit zero sewage? After all, the total benefits of zero-emissions exceed the total costs.

An emissions tax on a quantity of emissions from a firm is not a command-and-control approach to reducing pollution. Why?
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