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28 Oct 2020

6. A perfectly competitive paper mill that produces large amounts of pollution (a negative externality) will, from a social point of view,

a. produce too little paper.

b. produce the socially optimal quantity of paper.

c. produce too much paper.

d. produce too much paper only if it installs pollution control equipment.

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Defining Negative Externality
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Raushan Raj
Raushan RajLv8
28 Oct 2020

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Related questions

John has a factory that produces paper and as a side product, some chemicals are thrown into the water: one unit of the pollutant per unit of paper. The marginal benefit to John of producing paper is given by MB = 10 - Q. The marginal cost is given by MC = 3 + Q. Amy's fishing decreases with pollution: for each unit of pollutant, her income decreases by $1.

a. What is the socially efficient quantity of paper to produce?
b. What quantity will be produced by John privately? What is the net social loss (deadweight loss) associated with this?
c. Suppose the government does not know John's marginal cost, what policy can it implement to make John produce the efficient amount?

1. What type of externality (positive or negative)is described in

each of the following examples? Is the marginal social benefit

of the activity greater than or equal to the marginal benefit to

the individual? Is the marginal social cost of the activity

greater than or equal to the marginal cost to the individual?

Consequently, without intervention, will there be too little or

too much(relative to what would be socially optimal) of this

activity?

a. Mrs Chau plants lots of colourful flowers in her front yard.

b. Anna Crombie and Fritz, a popular clothing store, open ina lot of

small, attracting more shoppers who also visit other stores.

c. The fraternity next to your dorm plays loud music, keeping

you from studying.

d. Maija, who lives next to an apple orchard, decides to keep

bees to produce honey.

e. Justine buys a large SUV that consumes a lot of gasoline.



1. What is meant by the Pareto Efficiency of an allocation of resources? How unique is it for an allocation of resources to be Pareto efficient? What consideration is overlooked by Pareto efficiency? What does the First Theorem of Welfare Economics assert?

2. What is the distinction between a pecuniary externality versus a real (or technical) externality? Give an example of an interaction that constitutes a pecuniary externality. Give an example of an interaction that constitutes a real externality.

3. Imagine a price-taking producer whose production causes a real, negative externality. Draw a diagram to depict the economic outcome in this case, and how this differs from what is the socially optimal outcome. Also, depict Pigou's tax proposal to correct the externality.

4. Acme Charcoal is a charcoal producing company in Cleveland. Its total cost function is

C(QA) = 5 + 20QA + 2QA2, where QA is charcoal production per week in thousands of tons.

a) What is the formula for Acme's marginal cost function?

b) This is the nineteenth century, and no pollution control laws have yet been passed in the US. If charcoal sells in Cleveland for $420 per thousand tons, how much charcoal will Acme produce?

Clearview is an eyeglass company located near Acme Charcoal in Cleveland. Clearview's production of eyeglasses is negatively affected by the smoke from Acme's production of charcoal. Clearview's total cost function to produce eyeglasses is

C(QE) = 60QE + 2QE2 + 1.5QA where QE is Clearview's weekly production of eyeglasses and QA is Acme's weekly production of charcoal in thousands of tons.

c) What is the extra cost to Clearview from an additional thousand tons of charcoal production by Acme?

d) Eyeglasses sell for $160 per eyeglass. How many eyeglasses would you predict that Clearview produces per week?

e) How much profit do Acme and Clearview each earn in this situation?

f) What is the socially optimal level of production of charcoal by Acme? Explain the reason for your answer.

g) If Acme produced the level of production given in your answer to (f), how much would Clearview choose to produce?

h) Given your answer to (f) and (g), how much profit would Acme and Clearview each earn in that situation?

i) How might the outcome in (f) and (g) be brought about according to Pigou?

j) How might the outcome in (f) and (g) be brought about according to Coase if (I) the law makes Acme legally liable for damages resulting from his pollution, or (II) the law imposes no liability on Acme for the consequences of his pollution?

5. The Burnbright Electric Power Company has a coal-fired power plant located in Northern Utah. Consider three alternative scenarios.

(i) The air pollution generated by burning coal at the Burnbright plant doesnâ't cause any pollution, but the trucks that ferry coal to the plant on a daily basis cause traffic congestion for the residents of a small town nearby.

(ii) The air pollution generated by burning coal at the Burnbright plant causes severe haze to occur at the Grand Canyon National Park during the summer season.

(iii) The air pollution generated by burning coal at the Burnbright plant contributes to worldwide greenhouse gas emissions, which contribute to global warming over the next fifty years.

a) Do you think it is likely that Coasian bargaining will take care of the externality and generate a Pareto-efficient allocation of resources without any need for government intervention to control the externality? Answer for each case separately, and explain the reasons for your answer.

b) What are transaction costs? How might they enter the picture in each case? How could they affect the outcome of Coasian bargaining?

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