Question

Consider a hypothetical market for good X using the information below. Price Quantity demanded Quantity supplied 700 300 600 400 500 500 400 600 300 700 200 800 100 900 0 1000 Suppose that the production of good X generates pollution in the form of chemical runoff and that the pollution imposes a $4 cost on society for each gallon of good X produced. What is the optimal quantity of good X production? Does the market overproduce or underproduce? O 300 - overproduce 700 - underproduce 600 - underproduce 400 - overproduce

Answer 1

1> 300 overproduce

Since pollution costs $4 per gallon, thus the difference in price paid to the producer should be = price - $4 per gallon

So, at output 300, price(supply)=1 and price(demand)=5, so there is a difference oF 4.

Of corse the market is overproducing, it does not acknowledge the cost of pollution.

2> Market equilibrium does not consider external costs like health cost.

So, Qd=Qs

60-3P=3P

P=10

Q=30(Ans)

3> Patents

Patents give someone or an entity the exclusive right to sell the product. Thus, it rather stops the externality of the product, so it is not a good example

4> 0 Common Resource

In equilibrium, no one will invest anything on that account.

The reason behind this is, irrespective of what other invests, if I invest X more, I will get a return of 0.9X, thus I will incur a loss if I keep the money on that account.

Thus, in equilibrium, there will be no investment although it is not an optimal outcome.

This is a common good, the reason behind this is it is non-excludable because I can not stop someone from enjoying the benefit of the investment account. But, it is rival, as if I take the money from the investment account, the pool decreases. Thus, it is a common good.

As HOMEWORKLIB rule, first 4 problems have been solved.