Hello, could you please help me answer this question? Thanks the fomation about
ID: 1118158 • Letter: H
Question
Hello, could you please help me answer this question? Thanks the fomation about costs and benefits that arise from production of pesticide that pollutes a river used to water paddy farms Pesticide Marginal Marginal Social Output c Marginal pesticide producer's MC Esternal Cost Social Cost Benefit of Pesticide tons per week housand rupiah per ton 5.000 1. 100 0 100 300 600 1.000 1.500 2.100 2.800 660 1.340 2.000 2.660 3.340 1.000 4.660 3.300 .600 2.000 1.500 1.100 800 7 a) Calculate the marginal social cost of producing pesticide (fill in column 4 of the above table). [2 points] Suppose there is no regulation of pollution and no one holds any property right on the river. what is the quantity of pesticide produced? What would be the marginal cost borne by paddy farmers? [2points] c) What is the quantity of pesticide produced that is considered as efficient by the society? [2 points] Based on your answer to point b and c, explain how externality can cause market failure. [2 points] d) e) What should the government do to deal with the negative problem of externality? 14 points)
Explanation / Answer
(a) Marginal social cost (MSC) = Marginal cost (MC) + Marginal external cost (MEC)
(b)
Unregulated (market) equilibrium is where MC = MSB, which holds true when Output is 5 units with MC = MSB = 1,500.
Marginal cost borne by farmers = MEC = 3,340
(c)
Efficient outcome is where MSC = MSB, which holds true when Output is 3 units with MC = MSB = 2,600.
(d)
In this case market equilibrium output is much higher than efficient level of output, which gives rise to a negative externality leading to market failure caused by overproduction.
(e)
When Q = 3, MEC = 4,660. Therefore government can internalize the negative externality by imposing a Pigouvian tax of 4,660 per unit.
Q MC MEC MSC MSB 0 0 0 0 5,000 1 100 660 760 4,100 2 300 1,340 1,640 3,300 3 600 2,000 2,600 2,600 4 1,000 2,660 3,660 2,000 5 1,500 3,340 4,840 1,500 6 2,100 4,000 6,100 1,100 7 2,800 4,660 7,460 800Related Questions
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