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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

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The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions. Table 12.9shows the total cost and total benefits (in dollars) of this policy.

Table12.9

Land Restored (in acres)Total CostTotal Benefit
0\(0\)0
100\(20\)140
200\(80\)240
300\(160\)320
400\(280\)380

(a) Calculate the marginal cost and the marginal benefit at each quantity (acre) of land restored. See Production, Costs and Industry Structure if you need a refresher on how to calculate marginal costs and benefits.

b. If we apply marginal analysis, what is the optimal amount of land to be restored?

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.

Suppose you want to put a dollar value on the external costs of carbon emissions from a power plant. What information or data would you obtain to measure the external [not social] cost?
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