Unformatted text preview: What is the total social surplus at Q*?
Total social surplus is the area between SMB and SMC, which is A+B+G. This is equal to [CS]
+ [PS] - [environmental damage] = [A] + [B+C+G+H+R] - [R+T].
c. (2 points) Now consider a ban on production of Q (moving from QM to Q=0). What is the
total environmental benefit of this ban?
Total environmental benefit is the area under the MD curve between Q=0 and Qm , which is
d. (2 points) Describe in a sentence why it can help producers (for example in the setting above)
to have an environmental regulation that forces them to reduce production from QM to Q*.
When production is restricted to Q*, producers get to charge a higher price of P* (P*>Pm). This
could lead to new producer surplus being higher under the regulation than under the free market
View Full Document
This note was uploaded on 01/31/2014 for the course BILD 3 taught by Professor Wills during the Winter '07 term at UCSD.
- Winter '07