Question

Epidemiological studies link high rates of lung cancer among miners to dust particles inhaled while in the mines. Draw the demand, marginal social benefit, supply, and marginal social cost curves for the mining of ore. What kind of externality is this? Discuss any differences between the market equilibrium point and the efficient equilibrium point. What are some approaches that policymakers could consider implementing to address this market failure?

Answer 1

In ore mining, lung cancer is a negative externality which makes marginal social cost (MSC) to be higher than marginal private cost (MPC or supply). In following graph, D, MPC and MSC are demand, supply and marginal social costs respectively. Market equilibrium is at point A where D intersects MPC with price P0 and quantity Q0. Socially optimum outcome is at point B where D intersects MSC with price P1 and quantity Q1. It is seen that the efficient quantity is lower than market equilibrium quantity (Q1 < Q0) and efficient price is higher than market equilibrium price (P1 > P0). It means that in presence of negative externality, the market overproduces.

To address the negative externality, the government can impose a Pigouvian tax on mining companies which will internalize the externality, causing mining companies to produce more and thus increase price. Also, the government can intervene using Health and Safety laws at regulations which will make the mining companies increase safety regulations and equipment, thus producing less.