The corresponding table shows the demand schedule and two supply schedules for a

Question

The corresponding table shows the demand schedule and two supply schedules for a tire producer Quantity Demanded (daily Supplied demand) Quantity Is there an externality associated with Price (S) ires? Quantity Supplied (if firms consider both (if firms onl consider private private costs and costs) (daily supply) Yes, a positive O externality O externality O No environmental Yes, a negative 60 80 100 120 140 110 100 90 80 70 60 70 80 90 100 110 120 llution costs) (daily supply) 50 60 70 80 90 100 At a price of $100/tire, 90 tires are demanded daily. At this price, how will society be affected environmentally if the producer is not required to account for environmental pollution costs and produces 90 tires? The socially efficient number of tires is than the number of tires that results from the market provision of the good O higher O lower O the same as O Society is better off Society is worse off Society experiences no change

Explanation / Answer

(a) Yes, there is a negative externality

(Pollution gives rise to an external cost and is a negative externality)

(b) Society is worse off

When a producer produces an output without considering the externality cost caused by negative externality, the society is worse off.

(c) Lower

In presence of negative externality, socially efficient output is lower than, and price is higher than, private market equilibrium outcome.

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