Use the accompanying table to answer the following questions. Quantity Private C
ID: 1100221 • Letter: U
Question
Use the accompanying table to answer the following questions.
Quantity Private Cost Social Cost Benefit
1 $ 2 $ 4 $12
2 $ 6 $ 10 $22
3 $ 12 $ 18 $30
4 $ 20 $ 28 $36
5 $ 30 $ 40 $40
a. What is the external cost per unit of output?
b. What level of output will be produced?
c. What level of output should be produced to achieve economic efficiency?
d. What is the value to society of correcting the externality?
4. What level of tax would be appropriate to internalize the externality in exercise 3?
Explanation / Answer
The external cost is the difference between private costs and total costs to society.
b.
Level of output is subjective. It can either be the one that maximises the social welfare or the one that maximises the private welfare.
Since most of the business run on profits motive it is valid to assume that the out will be one that maximises the private producers profits.
Therefore output will correspond to PMC=MB. PMC=private marginal cost
By interpolating PMC=MC at output=3.5
c.
Now this is the one that maximises the economic efficiency or that is one that maximises the social welfare.
There here SMC=MB. this is at output = 3
d.
At point 3.5 the difference between succesive External costs is $1 (by interploating $7-$6) per 0.5 unit or the value they are willing to give up is $6 for manufacturing only 3 units instead of 3.5 units.
Tax
If you see every successive increase in output causes the externality cost to rise by $ 2 /unit. So a tax of $2 per unit should be imposed to internalise.
Quantity Private Cost PMC Social Cost SMC Benefit MB External Cost 1 $ 2 $0 $ 4 $0 $12 $12 $2 2 $ 6 $4 $ 10 $6 $22 $10 $4 3 $ 12 $6 $ 18 $8 $30 $8 $6 4 $ 20 $8 $ 28 $10 $36 $6 $8 5 $ 30 $10 $ 40 $12 $40 $4 $10Related Questions
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