Question

1.  Milk production requires the use of millions of cows. Cows release methane gas and waste piles that can cause major pollution problems.   a. Is there too little, too much or the correct amount of milk produced from a socially optimal perspective? Prove your answer by drawing a graph representing the market for milk that correctly identifies private and social marginal benefit and marginal cost curves along with the market equilibrium price and quantity versus the socially optimal equilibrium price and quantity. Also, identify any deadweight loss in the graph if any.  

b. What is a good regulatory policy that can be used to reduce deadweight loss in this case? Briefly describe the effect of this policy in the milk market.

Answer 1

a)

Here, the marginal benefit of milk is lower than the social cost, that will lead to a dead weight loss in the market. the blue area represents the dead weightloss due to methane and gas production by cows.

b) government can put tax on having cows that will increase the cost of producing milk and make cows costly decreasing the number and removing the deadweight loss in the market.