Question

In: Economics

a) Consider a perfectly competitive market. Suppose that production causes pollution as a by-product. Explain why...

a) Consider a perfectly competitive market. Suppose that production causes pollution as a by-product. Explain why markets fail to generate an efficient outcome in the presence of pollution, and how an environmental tax can restore efficiency. What difference, if any, does it make for the optimal environmental policy whether the firms have abatement technologies available or not? Use relevant diagrams to illustrate your arguments.
b) Now suppose that a single firm supplies this market. Characterise the optimal environmental policy in the case of a monopoly. Does it now make a difference whether an abatement technology is available or not. Use again relevant diagrams to illustrate your arguments.

Solutions

Expert Solution

a)

In the presence of negative externalities, firms tend to overproduce. Overproduction affect the environment negatively. Social marginal cost (SMC) is greater than the Private Marginal Cost (PMC), hence, firm does not take into account the social marginal cost while deciding level of output.

firm may go for the better technology if fear of carbon tax looms.

Imposition of tax by the government would make firm to internalise the external cost in its production decision and it would reduce the output level. Following is diagram:

In above diagram, imposition of tax shifts the MC or supply curve to left thereby reducing output to optimal level. Tax is equal to Marginal external effect.

b)

Output in monopoly competition tends to be less than the competitive market. Hence, to some extent, it is able to reduce the negative effect of output marginally. Government can impose tax to reduce the output to optimal level.

Firm would go for clean technology if it profitable. Firms would analyze it base on the amount of tax being imposed.

Following is diagram:

In above diagram, after imposition tax, MC increases hence output also falls from Qm to Qs.


Related Solutions

Consider a product with a perfectly competitive market. Carefully explain why nations gain from engaging in...
Consider a product with a perfectly competitive market. Carefully explain why nations gain from engaging in international trade in this product. Do nations gain equally from trade? If not, what determines which country gains more? (In your answer you can assume a two-country world
Consider the market for exchange of Atlantic cod and suppose that it is perfectly competitive. For...
Consider the market for exchange of Atlantic cod and suppose that it is perfectly competitive. For each of the following scenarios identify the following: which curve shifts (Demand or Supply), which direction it goes in (Right or Left), what happens to price as the market re-establishes equilibrium (Rise or Fall), and what happens to quantity exchanged as the market begins to clear (Rise of Fall). Point form or bulleted responses are appropriate for this problem. You do not need to...
Consider the market for ice cream. Suppose that this market is perfectly competitive. The cost structure...
Consider the market for ice cream. Suppose that this market is perfectly competitive. The cost structure of the typical ice cream producer is as follows. Average total cost is equal to ???(?)=50?+12?, average variable cost is equal to ???(?)=12?, and marginal cost is equal to ??(?)=?. a.) Give a formula for the typical ice cream producer’s average fixed cost ???(?). What is the typical ice cream producer’s total fixed cost? b.) How many ice cream cones will each producer sell...
Consider the perfectly competitive market for canoes. Suppose the market demand for canoes is described by:...
Consider the perfectly competitive market for canoes. Suppose the market demand for canoes is described by: Q d = 200 − 2 P and the market supply of canoes is described by: Q s = 2 P. Suppose there is currently a price floor of $70 in place in the market for canoes. Consumer surplus under this price floor is (A) $900 (B) $4,900 (C) $2,500 (D) $1,800 . Suppose the government removes the price floor, consumer surplus will (A)...
Explain why a perfectly competitive market maximizes social welfare.
Explain why a perfectly competitive market maximizes social welfare.
a) Consider a firm that sells its output in a perfectly competitive product market, and hires...
a) Consider a firm that sells its output in a perfectly competitive product market, and hires labour in a perfectly competitive labour market. The value of the marginal product of labour (in dollars) is given by:                                                                 VMPL = 30-2L Assuming that the firm is a profit maximizer and can hire labour at $W per unit, derive its labour demand function. b) Given that there are 10 identical firms (like the firm described is part (a)) in the industry, show...
Suppose there is a perfectly competitive market for curry puffs. The perfectly competitive equilibrium price in...
Suppose there is a perfectly competitive market for curry puffs. The perfectly competitive equilibrium price in this market is RM5 per puff. The perfectly competitive equilibrium quantity is 5,000 curry puffs. (a) Using a diagram, illustrate the perfectly competitive equilibrium in the market for curry puffs. Clearly label the areas of consumer surplus, producer surplus, and social surplus at this equilibrium. [3 marks] (b) Suppose that the government introduces a price floor for curry puffs at RM7 each. Note: Use...
Consider a firm which sells its product in a perfectly competitive market where the market price...
Consider a firm which sells its product in a perfectly competitive market where the market price is $4.20 per unit. The firms in the market have identical cost structures and is described by the following equations: TC = 40 + 0.1q2(squared) - 0.2q ATC = 40/q + 0.1q- 0.2 MC = 0.2q - 0.2 AVC= 0.1q - 0.2 1.a) What quantity should the firm produce to maximize its profit? 1.b) What is the firm’s profit at its profit-maximizing level of...
Consider the perfectly competitive market for dogs. Suppose that the demand curve for dogs is given...
Consider the perfectly competitive market for dogs. Suppose that the demand curve for dogs is given by MBP = P = 200 - Q, and the supply curve for dogs is given by MCP = P = 40 + Q. (6 points) How many dogs are bought and sold at equilibrium? (6 points) Suppose, to begin with, that dog buying and selling only affects parties that engage in it (i.e., buyers and sellers of dogs). How does the social marginal...
Is the gas market a perfectly competitive market? Why or Why not? What is the cause...
Is the gas market a perfectly competitive market? Why or Why not? What is the cause of these high prices? Are oil companies to blame? Is the government to blame? Should we enact price controls on the market? What can we do to combat the high prices
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT