Manufacturing processes that rely on fossil fuels create carbon dioxide and othe
ID: 2494749 • Letter: M
Question
Manufacturing processes that rely on fossil fuels create carbon dioxide and other greenhouse gases that may contribute to global warming. Suppose you are in charge of designing an economic policy to reduce carbon dioxide emissions: The inverse demand function for fuel is: The private cost of producing the fuels that emit carbon dioxide is: Atmospheric scientists haw computed that the environmental cost of fuels. (due to greenhouse gas emissions) is: What Is the market clearing price and quantity if only the private cost is considered? What Is the efficient price and quantity if l>>oth the private cost and social costs are considered? What Is the deadweight loss if firms does not take into account the externality? ( it lielps to draw a diagram and label it. then get the number!) Suppose the government imposes a carbon quota. Q. At which level should the quota Q be set to achieve an efficient outcome? How much should the government tax this good to arrive at the efficient quantity of carbon? Historically lead has been used in the production of paints and many other manufacturing processes. Lead, however, can seep into the topsoil and contaminates water supply and land, creating significant health risks for people who live in those areas. For example, the Gowanus Canal in Brooklyn was polluted enough by lead to be declared a superfund site. In the ease of a superfund. federal tax dollars are used to clean up an area. How is this situation different from the emission of carbon dioxide? Give an economic explanation, using concepts that we've learned in class.Explanation / Answer
(1) Market is cleared by equating marginal revenue with private marginal cost.
Inverse demand: P = 10 - 0.25Q
Total revenue, TR = P x Q = 10Q - 0.25Q2
Marginal revenue, MR = dTR / dQ = 10 - 0.5Q
Private cost, Cp = 10 + (1/12) x Q2
Marginal private cost, MCP = dCp / dQ = (2/12) x Q = Q / 6
Equating with MR,
10 - 0.5Q = Q / 6
60 - 3Q = Q
4Q = 60
Q = 15
P = 10 - 0.25Q = 10 - (0.25 x 15) = 10 - 3.75 = 6.25
(2) Efficient outcome is achieved by equating MR with Social marginal cost, SMC.
Total Social cost, TSC = Cp + CE = [10 + (1/12) x Q2] + (1/12) x Q2 = 10 + (2/12)Q2 = 10 + (Q2 / 6)
SMC = dTSC / dQ = 2Q / 6 = Q / 3
Equating with MR,
10 - 0.5Q = Q / 3
30 - 1.5Q = Q
2.5Q = 30
Q = 12
P = 10 - 0.25Q = 10 - (0.25 x 12) = 10 - 3 = 7
(3) Deadweight loss from externality = (1/2) x Difference in quantity x Difference in price** [between (1) & (2)]
= (1/2) x (15 - 12) x (7 - 6.25)
= (1/2) x 3 x 0.75
= 1.125
**Deadweight loss can be directly computed using this relationship and no diagram is required.
NOTE: First 3 questions are answered.
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