HW 3q - AEM 250: Environmental and Resource Economics...

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AEM 250: Environmental and Resource Economics Homework 3 – Market Failure (Externalities) Distributed: Feb 16, 2007; Due by beginning of class on Feb. 26, 2007 10 Points. Each question is weighted equally. All graphs should be clearly labeled and all other work legible. If we are unable to interpret your work, you will receive a lower score. 1. (Adapted from Harris, Question 1, p. 61) Consider the following supply and demand schedule for steel: Assume that the above supply and demand curves are linear between points (and do not extend beyond the first (positive, positive) quadrant). Pollution from steel production is estimated to create an external cost of $60 per ton. There are no taxes in these initial conditions. a. Clearly show the external cost, market equilibrium, and social optimum on a graph. b. Calculate the net economic surplus at the market equilibrium. Calculate the net economic surplus at the social optimum. What is the difference and why? Note – you do not have to divide the net economic surplus into consumer surplus and producer
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HW 3q - AEM 250: Environmental and Resource Economics...

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