Suppose that a chemical manufacturing plant is releasing nitrogen oxides into the air, and these emissions are associated with health and ecological damages

Economics Nov 21, 2020

Suppose that a chemical manufacturing plant is releasing nitrogen oxides into the air, and these emissions are associated with health and ecological damages. Economists have estimated the following marginal costs and benefits for the chemical market, where Q is monthly output in thousands of pounds and Pis price per pound. MSB = 50 -0.40 MSC = 2 +0,40 MEB=0 MEC = 0.20 a. Find the competitive equilibrium, Qc and Pc, and the efficient equilibrium, QE and Pe. b. Find the dollar value of a product charge that would achieve an efficient solution. Paragraph BTE

Expert Solution

Answer:

a) competative equilibrium

MPC = MPB

MSC - MEC = MSB - MEB
2+ 0.4Qc - 0.2Qc = 50 - 0.4Qc
0.6Qc = 48
Qc = 80
Pc = 2 + 0.2Qc
Pc = 18

ii) for efficient equilibrium
MSB = MSC
50 - 0.4Qc = 2+ 0.4Qe
48 = 0.8Qe
Qe = 60
Pe= MSB = 50 - 0.4(60) = 26

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