5. Below are the demand curves of three individuals for air quality in their nei
ID: 1214783 • Letter: 5
Question
5. Below are the demand curves of three individuals for air quality in their neighborhood. Air quality is measured in terms of mg/m3 of SO2 removed.
(a) If the marginal cost of reducing the ambient SO2 is $80 per mg/m3, what is the socially efficient level of air quality, assuming that society in this case consists of just these three people? [hint: here MC or supply cure would be a horizontal line at price = 80].
(b) If A’s marginal WTP increases by $10 per unit and C’s by $20 per unit. How would your answer to question (a) above change?
(c) For the society’s efficient level of SO2 removal in (a) and (b), compute the total costs and total benefits (total willingness to pay) and net benefits to society.
Quantity of SO2 Removed (mg/m3)
Marginal Willingness to Pay ($/mg/m3)
A
B
C
0
80
120
60
1000
60
100
40
2000
40
80
20
3000
20
60
0
4000
10
40
0
5000
6
20
0
6000
0
0
0
Quantity of SO2 Removed (mg/m3)
Marginal Willingness to Pay ($/mg/m3)
A
B
C
0
80
120
60
1000
60
100
40
2000
40
80
20
3000
20
60
0
4000
10
40
0
5000
6
20
0
6000
0
0
0
Explanation / Answer
Social optimal would be q=3000 where sum of marginal benefits is equal to marginal cost.
Then q=4000
Total cost=80*3000=240000=total benefit
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