Question

The figure below shows supply and demand for planting trees, based on private costs and benefits. Trees sequester carbon, meaning that they help counteract pollutants that contribute to climate change. Price of trees (S) Tools MCpm 20 18 16 14 A, DWL Social Cost 10 0 10 20 30 40 50 60 70 80 90 100 C Quantity of trees

Answer 1

a) Represent the graph as follows: 22 MCpvt 16 MCSocial 10 4 D MBpvt-MBsocial 30 80 Quantity of trees There will be a leftward shift in the MCpt curve. b) Ignoring the positive externality, 30 trees will be planted, as this is the equilibrium point and both the curve intersects each other. c) The socially optimal quantity of trees is 40 trees. d) Represent the graph as follows: Price of trees

22 МСpvt 16 MCSocial 4 D MBpvt-MB0cial 40 30 80 Quantity of trees In the above graph, the shaded region is the deadweight loss. Calculate the deadweight loss as follows: 1 Deadweight loss-x(40-30)(10-6) 2 -0.5x10x4 $20 Thus, the deadweight loss is $20 Price of trees