1. Production of steel generates pollution. Draw an S/D diagram for steel. Assum
ID: 407204 • Letter: 1
Question
1. Production of steel generates pollution. Draw an S/D diagram for steel. Assume that initially the government has no environmental policy. Your diagram should have three straight lines: label them S, D, and MSC (marginal social cost). S and D intersect at point K. Assume the environmental damage per unit of steel is $60. With no policy, 200 units of steel are produced and the price of steel is $240 but the socially optimal quantity of steel is 120 units shown at point I. Point J is $60 above K, and point H is $60 below I. Show all of these numbers, and points K and I, J, and H on your diagram.
2. See your figure from question 1. For the 200th unit of steel:
a) What is the marginal benefit (MB) to consumers? $______.
b) What is the marginal private cost of production (MPC)? $______.
c) What is the marginal damage to the environment? $______.
d) What is the marginal social cost? $______.
e) What is the marginal net loss to society? $______.
3. See your figure from question 1. What is the net loss to society from the production of units 121 through 200? 4. See your figure from question 1.
a) What tax per unit of steel would achieve the social optimum? $______.
b) This tax will shift the S curve (up, down), so the price of steel will (increase, decrease) and the quantity of steel will (increase, decrease).
c) Give the letters of the area that shows the environmental benefit: _______ ; the environmental benefit is $_______.
d) Give the letters of the area that shows the loss to society (ignoring the environmental gain) from the (increase, decrease) in steel: ______; the loss is $_______. e) Give the letters of the area that shows the net gain to society (the environmental benefit minus the loss from less steel): _______; the net gain is $_______.
Explanation / Answer
See your figure from question 1. For the 200th unit of steel:
a) What is the marginal benefit (MB) to consumers? $180
b) What is the marginal private cost of production (MPC)? $240
c) What is the marginal damage to the environment? $60
d) What is the marginal social cost? $$60
e) What is the marginal net loss to society? $60_.
a) What tax per unit of steel would achieve the social optimum? $60
b) This tax will shift the S curve (up, down), so the price of steel will (increase) and the quantity of steel will , (decrease).
c) Give the letters of the area that shows the environmental benefit: K; the environmental benefit is $$180
d) Give the letters of the area that shows the loss to society (ignoring the environmental gain) from the ( decrease) in steel: ______;
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