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Use marginal cost-marginal benefit analysis to determine if the following statement is true or false: 鈥淭he optimal amount of pollution abatement for some substances, say dirty water from storm drains, is very low; the optimal amount of abatement for other substances, say cyanide poison, is close to 100 percent.鈥

Short Answer

Expert verified

The statement 鈥渢he optimal amount of pollution abatement for some substances say dirty water from storm drains, is very low; the optimal amount of abatement for other substances, say cyanide poison, is close to 100 percent鈥 is true.

Step by step solution

01

Step 1. The optimal level of pollution abatement

The diagram given below shows

  • The marginal benefit of reducing a unit of pollution using a downward sloping MB curve (law of diminishing marginal utility, that is, the greater the reduction, the lower will be the utility from the next unit reduction).
  • The marginal cost of reducing unit pollution using an upward sloping MC curve.
  • The intersection of these two curves gives the optimal level of pollution reduction, which is Q*.

If MB > MC, an increase in reduction of pollution will increase efficiency. If MC > MB, the additional reduction will reduce efficiency as the opportunity cost of resources used to reduce the pollution is higher.

02

Step 2. Marginal cost-benefit analysis to find an optimal level of pollution abatement for dirty water and cyanide poison.

The marginal benefit associated with removing dirty water from storm drains lower than the marginal benefit associated with the removal of cyanide poison. The reason is cyanide poison is highly dangerous that can cost lives. Thus, a reduction in the poison level will result in higher benefits compared to dirty water removal.

This can be explained using the diagram below:

The diagram shows that:

  • MBCPis the marginal benefit curve for cyanide poison removal;
  • MBDWis the marginal benefit curve for dirty water removal;
  • The intersection of these two MB curves with the MC curve results in role="math" localid="1642759957993" QCPand QDWlevels of pollution reduction, respectively.

We can see that the optimal level of cyanide reduction is higher than the optimal level of dirt water reductionQCP>QDW. QCP is nearly 100 percent. Thus, we can say that the statement in the question is true, that is, the optimal amount of pollution reduction for substances like cyanide is very high, and the optimal amount of pollution reduction of substances like dirty water is very low.

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Most popular questions from this chapter

Assume that candle wax is traded in a perfectly competitive market in which the demand curve captures buyers鈥 full willingness to pay while the supply curve reflects all production costs. For each of the following situations, indicate whether the total output should be increased, decreased, or kept the same in order to achieve allocative and productive efficiency:

  1. Maximum willingness to pay exceeds the minimum acceptable price.
  2. MC > MB.
  3. Total surplus is at a maximum.
  4. The current quantity produced exceeds the market equilibrium quantity.

Draw a supply and demand graph, and identify the areas of consumer surplus and producer surplus. Given the demand curve, how will an increase in supply affect the amount of consumer surplus shown in your diagram? Explain.

Efficiency losses _______________

  1. are not possible if suppliers are willing to produce and sell a product.
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  3. can result only from overproduction.
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Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a low-quality 鈥渓emon.鈥

  1. Suppose that there are equal numbers of good and bad used cars in the market. Good used cars are worth \(13,000, and bad used cars are worth \)5,000. What is the average value of a used car?
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Refer to Tables 4.1 and 4.2, which show, respectively, the willingness to pay and the willingness to accept of buyers and sellers of bags of oranges. For the following questions, assume that the equilibrium price and quantity depend on the following changes in supply and demand. Also assume that the only market participants are those listed by name in the two tables.

a. What are the equilibrium price and quantity for the data displayed in the two tables?

b. Instead of bags of oranges, assume that the data in the two tables deal with a good (such as firework display) that can be enjoyed by free riders who do not pay for it. If all the buyers in the two tables free ride, what quantity will private sellers supply?

c. Assume that we are back to talking about bags of oranges (a private good), but the government has decided that tossed orange peels impose a negative externality on the public that must be rectified by imposing a \(2-per-bag tax on sellers. What is the new equilibrium price and quantity? If the new equilibrium quantity is the optimal quantity, by how many bags were oranges overproduced before?

PersonMaximum price willing to pay (\))
Bob
13
Barb12
Bill11
Bart10
Brent9
Betty8
PersonMinimum acceptable price ($)
Carlos3
Courtney4
Chuck5
Cindy6
Craig7
Chad8
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