Question

CİSES 1. Consider the following supply and demand schedule for steel: 20 40 60 80 100 120 140 160 180 Qp (million tons) 200 180 160 140 120 100 80 60 40 20 60 100 140 180 220 260 300 340 Price per ton (S) Qs (million tons) Pollution from steel production is estimated to create an external cost of S60 per ton. Show the external cost, market equilibrium, and social optimum in a graph. What kinds of policies might help to achieve the social optimum? What would be the effects of these policies on the behavior of consumers and producers? What would be the effect on market equilibrium price and quantity? the chemical fan

Answer 1

The required graph is below: Free market equilibrium: Point of intersection of QD and QS curves: $80, 140 units Socially optimal: Point of intersection of QD and Social cost curves: $ 100, 12 units External cost: Distance between grey and orange colored curves Policy: Imposing tax on producers Effect on market: Producer will have to bear the cost of production and will thus reduce their supply of goods in the market. Thus, socially optimal price of steel increases while quantity of steel sold in market decreases Consumers will have to pay high price for steel but will find themselves better off Producers will be worse off as their sales would decrease