sol_odd_12

# sol_odd_12 - Problem#1 Chapter 12 Determine whether the...

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Problem #1, Chapter 12 Determine whether the following statements are true or false, and briefly explain why A) A given total emission reduction in a polluting industry will be achieved at the lowest possible total cost when the cost of the last unit of pollution curbed is equal for each firm in the industry B) In an attempt to lower their costs of production, firms sometimes succeed merely in shifting costs to outsiders

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Solution to Problem #1 (1) A) True Application of Equal Marginal Principle For optimal allocation of production, marginal cost should be the same across all the firms If one firm’s marginal cost is higher than the other’s, it is cost-minimizing to divert the production from the firm with a higher marginal cost to the firm with a lower marginal cost
Solution to Problem #1 (2) B) True Notion of Negative Externality It refers to situation where producers do not bear the complete production cost and the leakage is borne by a three-party outside the market Consider an example of production that generates sewage The sewage is supposed to be collected by a municipal government at a per unit charge However, the manufacturer escapes from the discharge fee by pumping the sewage into a river The river gets polluted and the society then bears an extra pollution cost

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Problem #3, Chapter 12 Suppose the supply curve of boom box rentals in Golden Gate Park is given by P = 5 + 0.1Q, where P is the daily rent per unit in dollars and Q is the volume of units rented in hundreds per day. The demand curve for boom boxes is 20 – 0.2Q. If each boom box imposes \$3 per day in noise costs on others, by how much will the equilibrium number of boom boxes rented exceed the socially optimal number?
Solution to Problem #3 (1) Equilibrium rental of boom boxes (Q*) Intersection of demand curve and supply curve 5 + 0.1Q* = 20 – 0.2Q* 0.3Q* = 15 Q* = 50 However, there is an (external) noise cost of \$3 per box Supply curve = marginal cost curve (the portion above AVC) Social supply curve = original supply curve + 3 Social supply curve = 8 + 0.1Q

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Solution to Problem #3 (2) Socially optimal rental of boom boxes (Q**) Intersection of demand curve and social supply curve 8 + 0.1Q** = 20 – 0.2Q** 0.3Q** = 12 Q** = 40 If the negative externality (noise) is internalized into the rental, the equilibrium rental is greater than the social equilibrium rental by 10 (50 – 40)
Problem #4, Chapter 12 Refer to problem 3. How would the imposition of a tax of \$3 per unit on each daily boom box rental affect efficiency in this market

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Solution to Problem #4 The imposition of a \$3 per unit tax is efficiency- enhancing Why? It actually internalizes the noise cost into the private
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sol_odd_12 - Problem#1 Chapter 12 Determine whether the...

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