Assume that a chemical company introduces a new compound, the production of which generates a negative externality.
Question:
Assume that a chemical company introduces a new compound, the production of which generates a negative externality. The environmental regulatory authority has estimated the following marginal costs and benefits for this new market:
MSB = 75 − 0.3Q
MEB = 0
MPC = 25 + 0.2Q
MEC = 0.5Q,
where Q is annual output in thousands of pounds, and P is price per pound measured in dollars.
a. For this new market, find the competitive equilibrium, QC and PC, and the efficient equilibrium, QE and PE.
b. Now suppose that the regulatory authority wants to internalize the externality by imposing a product charge on the new compound. Calculate the dollar value of a product charge that would achieve the efficient solution. Graphically illustrate this product charge and the competitive and efficient solutions.
Step by Step Answer:
a The competitive equilibrium arises where MPB MPC as shown below MPB MPC 75 03Q 25 02Q 05Q 50 Q C 1...View the full answer
Environmental Economics and Management Theory, Policy and Applications
ISBN: 978-1111826673
6th edition
Authors: Scott J. Callan, Janet M. Thomas
