Question

1. Socially Optimal Thneed Production (Graphical Analysis) based on Dr. Seuss’ The Lorax.

There is only one question, but it has several parts, (a) through (J), below, plus (k) and (l) for extra credit.

The demand curve and supply curve for Thneeds (“A fine something that all people need,” according to the Once-ler Group’s web site) are given by

Q^D= 100 –5P and

Q^S = 2.5P – 5

[HINT: these are regular—that is economically sensible—demand and supply curves that say “consumers and producers observe prices and decide what quantity to consumer or produce.”]

Thneeds are produced from the bright-colored tufts of the Truffula Tree. Truffula Trees provide important food and shade resources for Brown Bar-ba-loots—a keystone species in the Trufula forest known to delight tourists with their behavior of frisking about in their Bar-ba-loot suits.

Because Thneed production involves cutting down Truffula Trees, there is an external cost imposed on society: degrading the Bar-ba-loot habitat leads to lost tourism revenue. Thneed production also produces "smogulous smoke" and "gluppity glup" which harm, respectively, the Swomee Swan and Humming Fish populations.

The government agency in charge of such matters estimates that each additional Thneed produced costs society $4.00 in total external cost—that is, the sum of the cost due to lost Bar-ba-loot-habitat, and the emission of smogulous smoke and gluppity glup.

Under pressure from the small, but relentless, Lorax Lobby, the agency has agreed to curtail these impacts, and it has hired you to advise it by (1) finding out how big a problem the external costs are, and (2) helping to devise a way of achieving a socially optimal level of Thneed production.

1. Unfortunately, the agency has forgotten how it came up with that $4-per-Thneed number, so your first task is to suggest an appropriate method for estimating the costs associated with the following effects. The agency is sure it used three different methods, however, so be sure you list three different methods, and explain how you think the method would have been used in deriving the agency’s estimate. [Hint: it will help if you first think about what the biophysical effects of these are, then think about how the effects would affect human welfare and, therefore, economic well-being.]
   
   1. Loss of Bar-ba-Loot Habitat. Method = _______________________________
      Explain:
      
   2. Impact of Smogulous Smoke: Method = _______________________________
      Explain:
      
   3. Impact of Gluppity Glup: Method = _______________________________
      Explain:
      

The graph at the end of this document lays out the situation, but due to budget cuts at the agency, the graph has not been labeled. Your first task, therefore, is to provide an appropriate title, label the key features, and extract some useful information from the graph.

2. Please fill in the missing word in the title of the chart and provide an appropriate label for the X and the Y Axes. [Hints: the Y axis should be a price, and the X axis a quantity per unit of time…you can pick day, week, month, year.]

Then also fill in the blanks with the information requested and label the following elements of the graph, using the abbreviations in parentheses. :

3. Marginal Private Cost (MPC)
   1. What is the equation for the inverse of this function? __________________
4. Marginal Social Cost (MSC)
   1. What is the equation for the inverse of this function? __________________
5. Marginal External Cost (MEC)
   1. What is the equation for the inverse of this function? __________________
6. (Inverse) Demand (aka marginal benefit) (MB)
   1. What is the equation for this function? ________________________________

Now please also add the following to your graph:

7. P_m and Q_m, the market equilibrium price and quantity (before considering external cost).
8. P_s and Q_s, the socially optimal price and quantity (i.e., after considering external cost the subscript “s” is for “socially optimal”).
   1. Please provide your estimates (based on the graph)
      of the socially optimal price _______ and quantity _______
1. The deadweight loss (DWL) of Thneed production.

Finally:

10. The agency needs to be able to justify its intended actions to reduce Thneed-related externalities to a budget-conscious legislature, so you now need to explain, briefly, why these externalities and their associated deadweight loss are an ECONOMIC problem. Note that your audience (the legislature via an agency official, not your professor) might not be an economist, so don’t rely on economic jargon. Rather, explain in real, human terms what is going on.
    Please type your answer here:
    
    
    

The rest is for Extra Credit. You cannot lose points on those last two parts, so give them a try.

The agency is considering two policy interventions that it believes could achieve the correct—that is, the socially-optimal—level of Thneed production. It needs you to illustrate those options on the graph.

11. The first option is a Thneed Production Quota, meaning the Onceler Group will be allowed to produce up to some limited number of Thneeds per time period. Think about what that number is and then depict it on the graph. [HINT: What will the relevant marginal cost curve look like with the quota in place?]
    

The second option is a tax on Thneed production paid by the Onceler Group.
Mark the graph with a vertical arrow like this ↕ to show one or both of two spreads/spans in the graph that can tell you how big this tax should be.
How many dollars are indicated by that spread? That is, at what level (in dollars per Thneed) should that tax be set? _____________

What is this tax equivalent to?

Answer 1

a) Loss of Bar-ba-loot habitat :   Loss of Bar ba loot habitat has impacted on many people and society as bar ba loot tress leads to increasing the tourism cost and revenue but due to the deforestration of these trees the Revenue has decrease which could effect the GDP of the economy.

b)Impact of smogulous smoke :   Smogulous smoke means when something is polluted like water , air etc it looks smoky which effects the humming birds and swams and fishes as they were not able to swin fly or see.

c) Gluppity gulp In nut shell waste can be not they are not properly managed

PN MSC EXTERNALITY MPC --+-- MD i-t----- MB Qs QA

MPC Marginal private cost is a change in a producer's total cost brought about by the production of an additional unit of a good and service ''

Inverse supply curve also known as marginal private cost curve for refining is MPC = 2+Q
MSC Marginal social cost is neoclassical economics it is the sum of private costs resulting from a transaction and the cost imposed on the consumer as a consequences of being exposed to the transcation for which they are not copmpensated or charged

Marginal external cost marginal external cost is the cost to parties other than the producer or buyer of goods and services due to the production of an additional unit of goods and service

MEC = 0.5Q