# HW3_answer - Homework #3 E201 Due: 10:00a.m. Wednesday,...

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Homework #3 E201 Page 1 of 4 Due: 10:00a.m. Wednesday, April 03, 2008 Location: Wylie Hall 115 or Wylie Hall 123 Instruction: 1) Type or print legibly your name on the front page. 2) Type or print on one side of the paper only. 3) Answer must be in the same order as the questions. 4) STAPLE all pages together. 1. “The optimal level of pollution is zero.” True/false/explain. Use a graph to support your answer. False. Reduction of pollution is a good but it is not free. The Social Optimum occurs where the Marginal Benefits of pollution abatement is equal to the Marginal Cost. Beyond some level, the cost to clean up is greater than the benefit of cleaner air or water or land). See diagram below. Quantity of pollution abatement MB MC Marginal Cost Marginal Benefit Optimal Q 2. Use a supply-and-demand diagram to explain the effect of a negative externality in production on the market price and quantity. The external cost in production is shown by drawing the Social Cost curve above the Market Supply curve (the Private Cost curve):

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Homework #3 E201 Page 2 of 4 Q \$ D = Soc Value Social Cost S = Pvt Cost P 2 P 1 Optimal Q Mkt Q External Cost P 1 : price revealed by private market forces of demand and supply P 2 : price that includes the external cost in production 3. Alcohol consumption is directly related to motor vehicle accidents; thus, greater consumption of alcohol
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## This note was uploaded on 04/08/2008 for the course ECON 201 taught by Professor Sung during the Fall '08 term at Indiana.

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HW3_answer - Homework #3 E201 Due: 10:00a.m. Wednesday,...

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