2. A key factor in analyzing the industry-level effect of an environmental regulation is to study...

 

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2. A key factor in analyzing the industry-level effect of an environmental regulation is to study the so-called market-adjustment (or industry output-adjustment). Suppose that we are looking at the market for orange juice and the market for wine. Assume that the demand for orange juice is relatively inelastic (steeper demand) and the demand for wine is relatively elastic (flatter demand). Let the government introduce industry regulations that raise the marginal cost of production in both industries. For simplicity, assume that the marginal cost rise equally in each industry. a. Draw a graph of the demand curves facing these two industries. Show on your graph how an increase in marginal cost affects the price and output in each industry. Clearly label your graphs and curves. b. Which industry is likely to experience a larger market adjustment (or output adjustment)? Explain your answer. c. Which market is likely experience larger societal cost due to these regulations? Explain. 2. A key factor in analyzing the industry-level effect of an environmental regulation is to study the so-called market-adjustment (or industry output-adjustment). Suppose that we are looking at the market for orange juice and the market for wine. Assume that the demand for orange juice is relatively inelastic (steeper demand) and the demand for wine is relatively elastic (flatter demand). Let the government introduce industry regulations that raise the marginal cost of production in both industries. For simplicity, assume that the marginal cost rise equally in each industry. a. Draw a graph of the demand curves facing these two industries. Show on your graph how an increase in marginal cost affects the price and output in each industry. Clearly label your graphs and curves. b. Which industry is likely to experience a larger market adjustment (or output adjustment)? Explain your answer. c. Which market is likely experience larger societal cost due to these regulations? Explain.