a. Consider a competitive market supple and demand model. If there are no extern

Question

a. Consider a competitive market supple and demand model. If there are no externalities, explain why economists describe the competitive equilibrium an efficient?

b. Suppose instead that all of the firms in this market vent an ozone reducing chemical into the atmosphere as a consequence of their production activities. Is this new outcome efficient? explain with a diagram

c. Do these firms have an incentive to to reduce their pollution? Explain with diagram.

d. Modern economists suggest 2 solutions to the pollution problem above. Explain how a pollution tax (use diagram) and an emission permit trading scheme can both "solve" the problem of pollution.

Please have answers listed in seperate paragraphs for each a,b,c,d.

Explanation / Answer

a) The invisible hand of the competitive market results in a more efficient allocation of resources than prices set by a government can ever hope to achieve.

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