Question

Marginal benefit Marginal social The table below shows information about the costs and benefits of a steel smelter that pollutes the air of a city. The marginal external cost of this pollution is $10 per ton at every quantity of steel produced. Use this information to answer questions 33-35. Quantity of steel (millions of tons cost (dollars per per week) (dollars per ton) 5 40 20 10 35 25 15 30 30 20 25 35 25 20 40 - ton) 33) If the market is competitive and left without government intervention, quantity of steel will be produced? 34) What is the efficient quantity of steel? 35) The government decides to tax steel production. What should the government set as the tax in order to have the efficient amount of steel production?

Answer 1

External cost = $10 per ton

Quantity	Marginal benefit	Marginal private cost	Marginal social cost = MPC+ EC
5	40	20	30
10	35	25	35
15	30	30	40
20	25	35	45
25	20	40	50

(a) If the market is competitive and left without government intervention ,then the quantity of steel will be produced = 15 tons i.e where marginal benefit equals marginal cost.

(b) Efficient quantity of steel is 10 tons when marginal benefit equal marginal social cost.

(c) If the government decides to tax steel production ,then the government should set tax equal to the external cost = $10 per ton in order to have the efficient amount of steel production .