Part 4. Economic Equations and Graphs 1. Graphical questions (A - D): 2. Graphical questions (A - C): A. Which graph below represents a negative externality ? Why? A. Which curve below represents a corrective tax that achieves the socially optimal output? Why? B. Which graph below represents a positive externality ? Why? B. Which curve below represents a corrective tax that moves the market output farther away from the socially optimal output than was the case before the tax was applied ? Why? MSC = MPC + MEC S = MPC External Costs (linked to a negative externality) .... External Costs Price and Cost Representative of Price Market Failure D (MPB, MSB) Quantity Q2 Quantity Putput Market Output pially Petimal Output Socially Optima Output C. Exhibit 1: Label the Graph? C. Exhibit 4: Label the Graph? 3. The objective of the government is to reduce the pollution in the area of firms X,Y, & Z Representative of Market Failure S (MPC, MSC) from 12 units to 6 units by introducing market environmentalism. The government issues two (2) pollution permits to each firm. The government tells each firm that it can emit 1 unit of E2 pollution for each permit it has in its possession. Furthermore, the firms are allowed to buy and sell these permits. Using the following data, prove that pollution permits that can be bought Price and Cost and sold under market environmentalism can reduce pollution from 12 tons to 6 tons at lower E1 cost than a regulation that specifies each of the 3 firms must cut its pollution in half. MSB = MPB + MEE Firm "X" Firm "Y" Firm "Z" D - MPB Q1 Q2 Quantity Cost of Eliminating: Market First ton of pollution $200 $500 $1,000 Output Socially Second ton of pollution 300 700 2,000 Optimal Output Third ton of pollution 400 800 2,900 D. Exhibit 3: Label the Graph? Fourth ton of pollution 500 900 3,400