The table below gives the costs and benefits of a

The table below gives the costs and benefits of a firm operating under perfect competition: its activities create a certain amount of pollution. Assume that the costs of this pollution to society can be accurately measured.

(a) What is the profit-maximising level of output for this firm?

(b) What is the socially efficient level of output?

(c) Why might the marginal pollution costs increase in the way this example illustrates?


Output

(units)

Price per unit

(MSB)
 (£)

Marginal (private)

costs to the firm (MC)

(£)

Marginal external

(pollution) costs (MEC)

(£)

Marginal social costs

(MSC = MC + MEC)

(£)



1

100

 30

 20

 50


2

100

 30

 22

 52


3

100

 35

 25

 60


4

100

 45

 30

 75


5

100

 60

 40

100


6

100

 78

 55

133


7

100

100

 77

177


8

100

130

110

240




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