Question

Hi I help, solving these four questions, it would be beneficial if you would help me step-by-step thank you

1 Explain what is meant by negative externalities.

2) Describe how an over allocation of resources results when negative externalities costs are present and how this can be corrected by government action.

4) Solve the following using the graph:

Solve the following using the graph: NegativeExternalities.pdf

Calculate the cost borne to society at equilibrium?

5) What is the cost borne to society after Government increases taxes by $0.50?

6) Start at equilibrium. What is the cost borne to society after Government increases taxes by $1.00?

7) From question 6, how much in terms of quantity must consumers demand less to eliminate the cost borne to society?

Answer 1

Answers:

1. Negative externalities are the external costs inflicted on a third party, due to an economic transaction between two other agents. They are basically external costs for which the affected parties are not compensated. The effects of production and consumption are not directly reflected in market transactions in the presence of externalities, thus social costs become higher than individual costs. Externalities are thus an example of market failure and it seriously questions public policy. Since externalities are not reflected in the market, they can produce economically inefficient outcomes. For example, a negative externality occurs when an industrial plant dumps its toxic wastes in the nearby river. Due to this, the ecosystem of the river gets affected and the population of fish is reduced. This affects the livelihood of the nearby fishermen directly. The firm, however, has no incentive to compensate for the external costs that it inflicts on the fishermen while making a production decision.

2. The social cost of externalities can be studied with the help of cost-benefit analysis. In an unregulated market, the producers don’t take responsibility for the external cost of their decision. These costs are passed on to society. So, this causes a difference between the private cost and social cost. Consider the example of an industrial plant for this analysis. figure (1) shows the market demand and supply curves. Assume that the firm has a fixed-proportion production function so that input combinations cannot be altered to affect output. Waste can be reduced only by reducing the quantity of output it produces. At the equilibrium, the price of the commodity is P1 and the quantity produced in Q1. The firm maximizes its profit here. However, due to the external cost, the social cost is higher than the private cost. The social cost curve is represented by curve MSC. From the society’s point of view, the optimal output is Q*, where MSC = DD. So the firm is producing more output (Q2) than the socially optimum amount of output. So there is over the allocation of resources. The shaded portion in the graph shows the dead-weight loss to society due to a negative externality.

0 MPO to go 2

Addressing the negative externality issue requires strong governmental intervention.

1. The government can simply tax the producer proportional to the amount of social cost it inflicts. This will add to the MC of the producer, and the amount of output will decrease.
2. The government can introduce strong market regulation policies like emission standards, emission fees, and permits to regulate the market and produce an optimal solution.

4. Assuming the graph being drawn to scale, the equilibrium output in the market is 40 at price 3. However, the socially optimum output is 30. So, the firm produces 10 additional units of output. At the equilibrium output of 40, the MSC is higher than MPC. SO, the cost to society = The vertical distance between MSC & MPC = 5-3 = 2 units.

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5. If the Government increases taxes by 0.5 units, the MPC of the firm increases by 0.5 units. This is shown in Figure (3). SO, MPC curve shifts upward by 0.5 units (MPC’ in Figure (3)). The cost borne by the society = 4.5 – 3.5 = 1 unit.

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6. If the Government increases taxes by 1 unit, the MPC of the firm increases by 1 unit. The MPC curve coincides with the MSC curve. This is the optimal outcome and the cost borne by society is 0.

7. The cost borne to the society at Q =40 is 2. To make the cost 0 by reducing quantity, the society should demand 10 units less, so that MSC =MPC.