Question 1 Developing countries are in a haste to transform their economies. This requires establishing manufacturing...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 1 Developing countries are in a haste to transform their economies. This requires establishing manufacturing companies. However, such manufacturing firms can generate externalities through the production processes. Suppose that, a new oil processing factory, Jonat Oil Limited, is situated on the bank of Lake Volta. The private marginal cost (PMC) of producing oil (in GH per metric tonne) is given by the function, PMC = Q + 15, where Q is metric tonnes of oil produced. In addition to this private marginal cost, a marginal external cost (MEC) is created. The social marginal benefit (SMB) to society of oil production is given as, SMB = 35 - Q. Assume that each metric tonne of oil produces a pollutant which flows into Lake Volta, causing damage valued at GH 5. This is an external cost, as it is borne by the wider Lake Volta user community but not by the polluting firm. On the basis of these: (a) Calculate and interpret the output and price of oil production if it is produced under market conditions. (1 Mark) (b) Determine the socially efficient price and output of oil production if government forces the firm to correct the damages. (2 Marks) (c) How large should per unit of MEC has to be in order for it to be socially desirable that no output is produced? (2 Marks) (d) Assuming the government wants to use a command and control policy to achieve the same efficient outcomes as in Pigouvian taxes, where should output be restricted to? Discuss two practical problems associated with using such quantity restriction on this externality from a typical African country perspective. (3 Marks) AERC Page 1 of 4 (e) Sketch a diagram illustrating the private marginal cost (PMC), Social marginal benefit (SMB), marginal external cost (MEC), social marginal cost (SMC) functions and all other relevant results obtained in question one (1). (3 Marks) (f) Calculate the deadweight loss to society as a result of the internalisation of the external (2 Marks) cost. (g) Will the welfare loss due to the firm's overproduction be better than the case when the firm was asked to internalise the externality? (2 Marks) Question 2 (a) Government policy usually has two main goals, relating to welfare, for society. This welfare hinges on efficiency and equity outcomes of economic activities, which influence the standard of living of members of society. Critically examine the views of the egalitarian and utilitarian on equity of economic outcomes, making reference to your country. (8 Marks) (b) Market failures are critical market issues of concern to governments of all economies. By using diagrams and specific examples, explain the difference between negative consumption externality and positive production externality. In each case, explain why the market fails and recommend one possible policy action to correct each market failure. (7 Marks) Question 1 Developing countries are in a haste to transform their economies. This requires establishing manufacturing companies. However, such manufacturing firms can generate externalities through the production processes. Suppose that, a new oil processing factory, Jonat Oil Limited, is situated on the bank of Lake Volta. The private marginal cost (PMC) of producing oil (in GH per metric tonne) is given by the function, PMC = Q + 15, where Q is metric tonnes of oil produced. In addition to this private marginal cost, a marginal external cost (MEC) is created. The social marginal benefit (SMB) to society of oil production is given as, SMB = 35 - Q. Assume that each metric tonne of oil produces a pollutant which flows into Lake Volta, causing damage valued at GH 5. This is an external cost, as it is borne by the wider Lake Volta user community but not by the polluting firm. On the basis of these: (a) Calculate and interpret the output and price of oil production if it is produced under market conditions. (1 Mark) (b) Determine the socially efficient price and output of oil production if government forces the firm to correct the damages. (2 Marks) (c) How large should per unit of MEC has to be in order for it to be socially desirable that no output is produced? (2 Marks) (d) Assuming the government wants to use a command and control policy to achieve the same efficient outcomes as in Pigouvian taxes, where should output be restricted to? Discuss two practical problems associated with using such quantity restriction on this externality from a typical African country perspective. (3 Marks) AERC Page 1 of 4 (e) Sketch a diagram illustrating the private marginal cost (PMC), Social marginal benefit (SMB), marginal external cost (MEC), social marginal cost (SMC) functions and all other relevant results obtained in question one (1). (3 Marks) (f) Calculate the deadweight loss to society as a result of the internalisation of the external (2 Marks) cost. (g) Will the welfare loss due to the firm's overproduction be better than the case when the firm was asked to internalise the externality? (2 Marks) Question 2 (a) Government policy usually has two main goals, relating to welfare, for society. This welfare hinges on efficiency and equity outcomes of economic activities, which influence the standard of living of members of society. Critically examine the views of the egalitarian and utilitarian on equity of economic outcomes, making reference to your country. (8 Marks) (b) Market failures are critical market issues of concern to governments of all economies. By using diagrams and specific examples, explain the difference between negative consumption externality and positive production externality. In each case, explain why the market fails and recommend one possible policy action to correct each market failure. (7 Marks)
Expert Answer:
Answer rating: 100% (QA)
Question 1 a In market conditions the output and price of oil production can be determined by equating the private marginal cost PMC to the private marginal benefit PMB The PMC is given as PMC Q 15 an... View the full answer
Related Book For
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr
Posted Date:
Students also viewed these economics questions
-
Googles ease of use and superior search results have propelled the search engine to its num- ber one status, ousting the early dominance of competitors such as WebCrawler and Infos- eek. Even later...
-
why people who are sophisticated but face borrowing constraint would increase consumption when they receive transfer payment?
-
What functions do decision support systems support in business organizations? How does a DSS differ from a TPS and an MIS?
-
Write short notes on (a) sensitiveness of governor (b) isochronisms of governor (c) hunting of governor.
-
Endophyte is a fungus Neotyphodium lolli, which lives inside ryegrass plants. It does not spread between plants, but plants grown from endophyteinfected seed will be infected. One of its eects is...
-
When she established the department, she named Ann Hill, one of her best clerical workers at the time, to establish and manage the department. At rst, the department occupied only a corner of the...
-
Malimali Fish Products Ltd, A Malindi-based firm dealing in fish products, conducts training programmes for all its line managers. The managers ar expected to master, in particular, procedures in...
-
Kathy wants to buy a condominium selling for $95,000. The taxes on the property are $1500 per year, and homeowners insurance is $336 per year. Kathys gross monthly income is $4000. She has 15 monthly...
-
12) Write down the output for the following scripts? (7 marks) Script T= (((('a',1), 'b', 'c'), 'd', 2), 'e', 3) len(T) X=0281 print(X) x,y=7,2 x,y,x=x+1,y+3,x+10 print(x,y) name='KSA' age=18...
-
Suppose two firms, Genera Pharma and Futura Pharma, are the only two producers of a specific drug. Genera and Futura have the same formula and sell the drug for the same price, but they are...
-
What is the discounted return on investment for problem 3.3 using a discount rate of 15% per annum assuming the cash flows are received at the middle of the year? What is the discounted profit to...
-
A lake contains fishes of n different species. A fisheries biologist catches fishes from the lake until she has caught one example from each species. Assuming that the probability of being caught is...
-
(1 point) a) The rectangles in the graph below illustrate a ? The value of this Riemann sum is b) The rectangles in the graph below illustrate a ? The value of this Riemann sum is Riemann sum for...
-
Consult the spreadsheet entitled "Walmart Cost of Capital Supplement." Give an explanation of how Dale and Lee have calculated Walmart's cost of capital. Do you agree with their estimate of Walmart's...
-
Three friends ride a Ferris wheel with a diameter of 77m. Their combined mass with each car of the Ferris wheel is 379kg. When their car is at position A, the steel support applies 681N force at the...
-
A summary of changes in Pen Corporation's Investment in Sam account from January 1, 2011, to December 31, 2013, follows (in thousands): ADDITIONAL INFORMATION 1. Pen acquired its 80 percent interest...
-
Identify the potential barriers (or obstacles) that face companies considering or expanding international marketing operations. Which are the most important and which are less important? Explain.
-
Discuss the relationship between objective and strategy in pricing.
-
Why are management styles and any cultural difference that exist in styles, important in all types of market entry modes involving partners?
-
Perhaps the most famous case illustrating the enormous cost of winning back lost customers is that of the Tylenol Murders. Seven people in the Chicago area died suddenly after taking Tylenol...
-
Give a brief rationale for empowerment.
-
Describe the concept of MBWA.
Study smarter with the SolutionInn App