Based on your answer to Problem 5-17, if Pennsylvania's government aims to correct the steel market's negative externality via an effluent fee, is the appropriate fee higher or lower now that steel producers have adopted the new technique? Why?

Problem 5-17

Suppose that panel

(a) of Figure 5-1 applies to Pennsylvania's steel market. Suppose that steel manufacturers in this state adopt a new, equal-cost technique for producing steel that entails a smaller external cost. In the absence of any government. action to correct the negative externality from steel production, would the overallocation of resources to steel production in Pennsylvania be larger or smaller following the adoption of the next steel-manufacturing technique?

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FIGURE 5-1 External Costs and Benefits In panel (a), steel production generates external costs. If producers ignore pollution, the equilibrium quantity of steel will be 110 million tons. If producers had to pay all costs, the supply curve would shift the vertical distance A-E, to S. In panel (b), inoculations against communicable diseases generate external benefits. If each individual Price of Steel per Ton ($) 900 800 1 Panel (a) A E E S S 100 110 Quantity of Steel per Year (millions of tons) ignores these external benefits, the market clearing quantity will be 150 million. If buyers of inoculations took external benefits into account, however, the demand curve would shift to D. The new equilibrium quantity would be 200 million, and the equilibrium price of an inoculation would rise from $40 to $45. Price of Inoculation ($) 45 0 Lir E Panel (b) E D 150 Quantity of Inoculations per Year (millions) 200 D