Question

a. Ae you uru ires the extensive burning of coal, and wing information about the steel industry. parket inverse) demand and supply for steel are 3. The process of transforming iron ore into steel requires the thus creates air pollution. We are given the following inform Assume that it is perfectly competitive. The market inverse Pa = 20 - di el production can be described by: P, = MC = 2 + 4s. Further, the marginal pollution damage from steel production MEC = MD = 0.59. a. What are the equilibrium price and quantity when there externality? uantity when there is no correction for this b. What are the socially optimal price and quantity? loss from not producing at the socially optimal the value of the deadweight loss from not producing at the price and quantity? was a monopoly, with the same demand uld the total deadweight loss for the monopoly be before an d. Suppose instead that the steel industry was a monopoly, with the function. What would the total deadweight loss fo after the correction for the negative externality?

Answer 1

Given. . It is given that, demand equation on Private marginal benefit equation is => PMB = 209d = Social Margircel benefit (3MB) => Private marginal cost equation is >>PMC = 2+ls os External Marginal cost is = EMC = 0.59 social marginal cost = Pmcreme - 2+95 +0.52 SMC = 2+1.59 cost and beneht smc 2o - Pmc Pm ----- pmg - SmoDemand quantity

Herren a) when their is no correction for externality, market equilibrium occurs where PMB=pmc. " 20-9 = 2793 => 29 = 18 => qe = 9 & when qe=9, from any of PMB or, Pmc equation, we get ==> PMB Pmc - 2+9=11 .. when there is no correction for externality , cau librium Price = Pe = 11 and quanting = =9. Here: b) At socially optiorel equilibrium, SMB-smc 20-40 2+1:59 => 'a:59 20-2 =) 2.59 = 18 => am = 18 1 =) 7.2 At thiy quantity, from any of SMB Oy, Sme equation we go, SMB = sme = 8+(1.5x7.2) = 11.8 = Pm i socially op koral quantity emta and Socialy optimal Price ,pm = 12.8

Heroi c) cost and benefit 20 -smc - Pmc 15:5 1a 8 Demand =PMB-SMB 7. 29 quantity .. DWL from not producing at the socially optimal quantity is shown by the shaded area in the graph. - DWL = = * (15-5+11) *(9-79) = 4.05