this is the question of maecro econ theory.

Anonymous
timer Asked: Nov 27th, 2018

Question description

The process of tanning leather creates toxic byproducts that pollute the local water supply. Suppose that a city’s tanneries (i.e., producers) compete in a perfectly competitive market, facing demand given by p(Q) = 120−Q and a constant (private) marginal cost of 30. Leather production causes external damage equal to.

  • Draw a clearly labeled graph representing this market. Your graph should include:
    • The private marginal benefit curve (i.e., the demand curve)
    • The private marginal cost curve (i.e., the supply curve)
    • The marginal damage curve
    • The social marginal cost curve
  • On your graph from part a, mark the competitive quantity (Qc) and price (pc). Shade in the deadweight loss and compute its area. Then calculate the total surplus (by first computing the consumer surplus, producer surplus, and total external damage).
  • Find the socially optimal quantity (Qs). What is the marginal damage at Qs? What is the social marginal cost? What is the willingness to pay of the marginal consumer?
  • Suppose that the city sets a market-wide quota equal to Qs. (For instance, if there are N firms, the city could allow each firm to sell up to units.) Compute the total surplus. (Hint: the change in total surplus relative to part b should equal the original deadweight loss.) Would the tanneries support this policy? Why or why not?
  • Now suppose that the city decides to switch from a quota to a Pigouvian tax. In class, we saw that the government can ensure that the socially optimal quantity is produced by imposing an appropriate corrective tax on producers. Suppose instead that the city imposes a specific tax t on consumers for each unit they purchase. Find the value tthat results in the socially optimal amount Qs being produced.

Include axis labels for all points where these curves intersect each other or the axes.

Copyright2018 by Brendan M. Price. All rights reserved.1

2Types of goods

  • Give an example of a public good that we haven’t discussed in class. Explain why you consider it a public good.
  • Give an example of a common good that we haven’t discussed in class. Explain why you consider it a common good.

Tutor Answer

(Top Tutor) Studypool Tutor
School: New York University
Studypool has helped 1,244,100 students
flag Report DMCA
Similar Questions
Hot Questions
Related Tags

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors