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Chapter 12: Q.42 (page 298)

Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?

Short Answer

Expert verified

The sound of trumpets is a negative externality.

Step by step solution

01

Negative Externalities  

When the manufacture and use of a product has a detrimental impact on a third party.

02

Concept

The price of a private cost equilibrium is $10, and the quantity is 5. (private cost does not include social cost). The equilibrium price for social cost is $12, and the quantity is 4 (social cost includes private and external costs).

Externalities also incurred additional costs in the form of "external costs," lowering equilibrium quantity and raising equilibrium price.

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Most popular questions from this chapter

In a market without environmental regulations, will the supply curve for a firm account for private costs, external costs, both, or neither? Explain.

Suppose a city releases 16million gallons of raw sewage into a nearby lake. Table 12.8shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)


Total Cost (in thousands of

dollars)


Total Benefits (in thousands of


dollars)


16 million

gallons


Current situation
Current situation

12 million

gallons


50800
8 million gallons
1501300
4 million gallons
5001650
0 gallons
12001900

a. Using the information in Table 12.8, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs, and Industry Structure if you need a refresher on how to calculate marginal costs.

b. What is the optimal level of sewage for this city?

c. Why not just pass a law that firms can emit zero sewage? After all, the total benefits of zero-emissions exceed the total costs.

A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals

to clear some of Sherwood鈥檚 forest and grow corn, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection.

a. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis.

b. Which choices display productive efficiency? How can you tell?

c. Which choices show allocative efficiency? How can you tell?

d. In the choice between T and R, decide which one is better. Why?

e. In the choice between T and S, can you say which one is better, and why?

f. If you had to guess, which choice would you think is more likely to represent a command-and-control

environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?

For each of your answers to Exercise 12.2, will equilibrium price rise or fall or stay the same?

Classify the following pollution-control policies as command-and-control or market incentive-based.

a. A state emissions tax on the quantity of carbon emitted by each firm.

b. The federal government requires domestic auto companies to improve car emissions by 2020.

c. The EPA sets national standards for water quality.

d. A city sells permits to firms that allow them to emit a specified quantity of pollution.

e. The federal government pays fishermen to preserve salmon.
See all solutions

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