Problem Set Externalities 1. Suppose that the marginal benefit associated with c

Question

Problem Set Externalities 1. Suppose that the marginal benefit associated with corn production is MB 2.5. The marginal private cost of production is MPC 2+0.1Q, where Q measures bushels of corm produced in thousands. The marginal external cost (MEC) caused by pollution in corn production is MEC-0.05Q. a. Compute the privately optimal output and the socially optimal output. of output in both equilibriums? new solutions for an increase in MB to MB -3. What has happen to the level 2. The supply of coal power electricity is given by qs 100p, where q is the kilowatts supplied each year and p is the price per kilowatt. Demand is described by qs 10,000- 400p, where qd is the kilowatts demanded cach year. Marginal external costs increases with electricity output and are given by MEC-0.05q a. Assuming that electricity is sold in a competitive market, what are the equilibrium market price and quantity? What is the efficient annual output of electricity? Show your answer in a diagram. b. Show how a corrective tax can achieve the efficient outcome by internalizing the externality. What is the efficient level of output? What is the tax rate? How does the efficient level of electricity output vary with the distribution of the tax revenues? 3. State the Coase theorem. State the assumptions that premise the Coase theorem. Provide an example of how the Coase theorem might be applied to internalize the marginal external costs associated with the pollution of a river by a chemical producer. 4. The private number of units consum dollars for each members of society marginal benefits for commodity X is given by 10 - X, where X is the unit of X produced, and external costs (MEC) of 2 dollars is imposed on ed. The private marginal cost of producing X is constant at 5 t intervention, how much X is produced a. In the absence of any govermmen b. What is the efficient level of production of X? tenem Movin& from the inefficient to the efficient level c. What is the gain to society involved in of production? t a Pigouvian tax that would lead to the efficient level. d. Sugges

Explanation / Answer

a) Privately optimal output rate is found by setting the private marginal benefit equal to the private marginal cost:

2.5 = 2.0 + 0.1Q. Solving for Q we obtain Q=5.

2.5 = 2.0 + 0.1Q +0.05Q. Q=3.33.

b. When the marginal benefit rises to MB=3, the private solution changes to Q=10 and

the social solution changes to 6.67.

3.) Coase theorem states that a market will be able to achieve an efficient allocation of resources if the functioning is allowed to be free. There should be full information given with the zero transaction costs. Property rights play a vital role in the coase theorem.

There should be no government intervention in the context of externalities.A production line dirtying the whole residential zone includes many dwelling individuals who won't not will to expect their well being.

4) a) In absence of government, market forces will determine equilibrium. Hence equating Private marginal cost and private marginal benefit.

10-x = 5

x = 5 units.

b) Effecient level of output includes externalities also.10 – X = 7

X = 3

c) Gain to society is the territory of the triangle whose base is the separation between the proficient and genuine yield levels, and whose tallness is the distinction amongst private and social negligible cost. Allocative productivity will come about because of such development.

d) Pigouvian assess is imposed on makers to revise negative externalities. An expense would be exacted that would expand the private cost to such an extent that the creation level will decline to unit 3. Duty of $2 per unit of x would be imposed. The legislature get income levels with Tax*units of generation = $2*3 = $6.

2) a) Qd = Qs

10000-400P= 100P

P=20

Q = 100P

=1000 *20 =2000

For efficient output, Qd= MEC

(10000-q)/400=0.05q

10000-q=20q

q = 10000/21

=476.19

b) For efficient tax rate,

t= MEC

t=0.05q

0.05*476.19

=23.8095

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.