.What price and output combination wil the monopoly select? 50 + - 1 30 Cost Dem
ID: 1203579 • Letter: #
Question
.What price and output combination wil the monopoly select? 50 + - 1 30 Cost Demand Revenue 100 200 300 400 500 600 Quantity b. Suppose the production of oil generates water pollution in a nearby river that costs a constant S10 per barrel of oil produced. What is the size of the negative extemality? If the monopolist included the cost of the negative extemality in its marginal costs, how would the marginal cost curve shift? Copy the graph and then draw in the social cost curve that includes the cost of the negative extemality in the monopoly's marginal costs c. If a tax equal to the negative extemality is imposed on each barrel of oil produced, what price will the monopolist charge and how much oil will be produced? Will this policy price will the motopof water in he river? How improve the quality of water in the river? How?Explanation / Answer
a) The monopolist will produce at the point of intersection of demand and supply curves. Looking at the above figure, this occurs where P=$30 and Q=300 units.
b) Size of negative externality is equal to the pollution done by production i.e. $10 per barrel of oil.
If the monopolist included the cost of negative externality in the marginal costs, the MC curve would increase and shift parallely to the left by $10.
c) Tax = Amount of negative externality = $10 per barrel
Production would fall to 250 units.
Yes, this policy will improve the quality of river, as producers will reduce their production and thus pollution because of taxes imposed upon them.
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