A chemical plant has the following supply and demand table. Answer the question
ID: 1158235 • Letter: A
Question
A chemical plant has the following supply and demand table. Answer the question based on the table below.
What is the equilibrium price and quantity when the supplier is not paying the cost of pollution?
What is the equilibrium price and quantity when the supplier is paying the cost of pollution?
What is the overall effect in this problem when the supplier absorbs the negative externality? That is, what is the difference in price and quantity?
Price
Quantity Demanded
Quantity Supplied without paying the costs of the externality
Quantity Supplied after paying the costs of the externality
$2.00
100
20
10
$4.00
80
40
20
$6.00
60
60
30
$8.00
40
80
40
$10.00
20
100
50
$12.00
10
120
60
Price
Quantity Demanded
Quantity Supplied without paying the costs of the externality
Quantity Supplied after paying the costs of the externality
$2.00
100
20
10
$4.00
80
40
20
$6.00
60
60
30
$8.00
40
80
40
$10.00
20
100
50
$12.00
10
120
60
Explanation / Answer
1) Equilibrium price $6.00; equilibrium quantity 60. Equilibrium occurs where demand equals supply at without paying the costs of the externality
2) Equilibrium price $8.00; equilibrium quantity 40. Equilibrium occurs where demand equals supply at paying the costs of the externality
3) When the supplier absorbs the negative externality the equilibrium price increase by $2.00 and equilbrium quantity falls 20 units
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