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Exercises 2 Circular economy.pdf - ECONOMIC INSTRUMENTS FOR...

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ECONOMIC INSTRUMENTS FOR A CIRCULAR ECONOMY: Pollutiontargets and economic instruments.Exercise 11.Suppose that a wood pulp mill is situated on a bank of the River Tay.The private marginal cost (MC) of producing wood pulp (in £ per ton) isgiven by the functionMC = 10 + 0.5Ywhere Y is tons of wood pulp produced. In addition to this private marginalcost, an external cost is incurred. Each ton of wood pulp produces pollutantflows into the river which cause damage valued at £10. This is an externalcost, as it is borne by the wider community but not by the polluting firm itself.The marginal benefit (MB) to society of each ton of produced pulp, in £, isgiven byMB = 30 - 0.5Ya. Draw a diagram illustrating the marginal cost (MC), marginal benefit (MB),external marginal cost (EMC) and social marginal cost (SMC) functions.b. Find the profit-maximising output of wood pulp, assuming the seller canobtain marginal revenue equal to the marginal benefit to society derivedfrom wood pulp.

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Term
Summer
Professor
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Tags
Economics, Externality, private marginal cost, MSBA

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