Suppose a steel plant dumps effluent into a river when producing steel, thus mak
ID: 1226754 • Letter: S
Question
Suppose a steel plant dumps effluent into a river when producing steel, thus making a recreation site downstream unsuitable for swimming and fishing. How could steel production potentially create a market failure?
A. The steel plant could produce too much steel, where the price of steel is less than the plant's marginal cost of production excluding the effluent cost.
B. The steel plant could produce too much steel, where the price of steel is lower than the plant's marginal cost of production including the effluent cost.
C.The steel plant could produce steel at all, because the marginal cost of the effluent from steel production is greater than zero.
D. The steel plant could produce an insufficient quantity of steel, where the price of steel is higher than the plant's marginal cost of production including the effluent cost.
E. The steel plant could produce an insufficient quantity of steel, because the plant would bear the cost of effluent.
Next, suppose cigarette smokers generate smoke that non-smokers breathe. How could cigarette smoking potentially create a market failure?
A. Smokers could smoke too many cigarettes, where the price of cigarettes is lower than the marginal cost of cigarette smoking including the cost of second-hand smoke.
B. Smokers could smoke cigarettes at all, because the marginal cost of second-hand smoke from cigarette smoking would be greater than zero.
C. Smokers could smoke too many cigarettes, where the price of cigarettes is equal to the marginal cost of cigarette smoking including the cost of second-hand smoke.
D. Smokers could smoke an insufficient quantity of cigarettes, because they would bear the cost of second-hand cigarette smoke.
E. Smokers could smoke an insufficient quantity of cigarettes, where the price of cigarettes is lower than the marginal cost of cigarette smoking including the cost of second-hand smoke.
Explanation / Answer
1.
Correct option:
B. The steel plant could produce too much steel, where the price of steel is lower than the plant's marginal cost of production including the effluent cost.
Reason: This is because of negative externality imposed by steel plant.
2.
Correct option:
A. Smokers could smoke too many cigarettes, where the price of cigarettes is lower than the marginal cost of cigarette smoking including the cost of second-hand smoke.
Reason: This is because of negative externality imposed by smokers.
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