Question

Paragraph Styles Unit 8 - Market Failures: Externalities, public goods, natural resources The production of coffee pods results in environmental damages when consumers throw the pods away. Currently consumers are not responsible for the costs of disposing of these coffee pods. MSC MPC The environmental damages caused by throwing away the coffee pods is an example of a:1 Vertical (Value) Axis Major Gridlines a. Positive externality b. Negative externality c. Private costs d. Private benefits Consider the market for coffee in the graph to the right 1. teft unregulated, what is the equilibrium price and quantity? What is the efficient quantity? 2. Is the efficient price higher or lower than the equilibrium price? The quantity in your groups discuss why.s 3. Suppose that the government imposed a 52 tax on the producers of coffee pods. Show the impact of the tax on the diagram. o e BLO w

Answer 1

the environmental damage caused by throwing coffee pods is an example of negative externality.

1) when left unregulated, we look at the demand function and private cost

the two curves intersect at a point where quantity=price=5

efficient quantity is when we consider social cost which is always more than private cost. the intersection of MSC and demand function gives quantity=4

2) the efficient price is higher than the equilibrium price because when social cost is incorporated instead of private cost, the total cost increases which in turn increases the price. the efficient quantity is lower than the equilibrium quantity. firm maximizes its profit and lower private cost results in more quantity production as compared to higher social cost.

3) A $2 tax on coffee pods production increases the cost of production for the producer as a result the MPC curve shifts upward, because cost has increased for every unit. this increases the equilibrium price and lowers the quantity.

4) tax makes the market more efficient because it increases the costs for producer. this cost includes the negative externality in it. as a result there is reduced production of the coffee pods which reduces the negative externality it causes.

5) if the market had a positive externality then imposing a tax would reduce the positive externality as it would reduce the quantity produced. efficiency of such a market could be improved by providing a subsidy as it would reduce cost of production and increase quantity and thereby increase positive externality.

6) public goods are non rival and non excludable. eg: the law

private goods are rival and excludable. eg: car

natural resoures are non rival and non excludable. eg: air

*the private markets with negative externality are inefficient because:

price is too low and quantity is too high

*a market with positive externality can be made more efficient by: subsidy

*public goods are: non rival and non excludable