Question

1. A chemical factory has leaked a toxic substance into the ground because fixing the leak was more expensive than the small amount of toxic substance was worth to them. Once it was discovered that the substance was contaminating local water supplies, though, the factory agreed to fix the leak.

1. Draw supply and demand curves for the chemicals produced by the factory before the contamination was discovered.
2. Which, if either, of these curves will be affected by the decision to fix the leak? Adjust your diagram to reflect this change. What, if anything, has happened to the equilibrium price and quantity?
3. How have the buyers of chemicals from the factory (who live far away from the contamination) been affected by the decision to fix the leak? Why do they feel that effect? Do you think that this effect is appropriate? Why or why not?

Answer 1