Question

What is the difference between: 

a) private cost and social cost for a chemical corporation whose output pollute the air? 

b) Consumer’s surplus and producer’s surplus? 

c) Average cost of a regular monopoly and average cost of a natural monopoly? 

d) Profit maximization condition and efficiency conditions for optimum resource allocation.

Answer 1

a) difference between private cost and social cost for a chemical corporation whose output pollutes the air:

Private cost is the cost incurred by the chemical corporation to produce the chemicals and by the consumers to use that chemical. The cost can be incurred by buying raw materials, processing them and creating chemical products.

External Cost is the cost incurred by those in society who are affected by the output of the chemical corporation which pollutes the air. The cost of buying medicines or as hospital bills by individuals or by the government to plant trees to reduce pollution. These external costs are not included in the books of corporations.

Social Cost = Private Cost + External Costs

b) Consumer Surplus and Producer Surplus

Consumer Surplus: it is considered as the difference between what the consumer is willing to pay and what he is actually paying for the good or service.

Producer Surplus: it is considered as the difference between what the produces sells and what he ready to accept for the good or service he provides.

In the market, because of the demand and supply curves, an equilibrium is formed which indicates the market price and average quantity to produce. Consumer surplus is the area between the equilibrium line and demand curve.

Producer surplus is the area between the equilibrium curve and the supply curve.

c) Average cost of regular monopoly and natural monopoly

Regular monopoly: An industry that has grown so mammoth in the market such that it regulates the prices of the good or service in its forte. The price of the product is close to the average cost of production is set by a legal entity to regulate the profits.

Natural Monopoly: This monopoly is created when there is no competition and one industry has access to all the raw materials to produce the goods and services. The average cost of the natural monopoly keeps falling and rising based on the cost structure.

d) Profit maximization and Efficiency:

Profit maximization: profit maximization occurs when marginal revenue generated from selling products is equal to the marginal cost incurred from producing it.

Efficiency: Efficiency is obtained when the price of a product is equal to the marginal cost of prodcuing it.