The citizens of the island country of Carribea were thrilled to learn a major oil deposit was discovered not far off the coast. They were less thrilled when they realized drilling resulted in unsightly blobs of oil washing up on their pristine white beaches and that building derricks spoiled the view from the balconies of the expensive beachfront hotels. Before the oil boom, tourism was Carribea's major industry, but fewer tourists now come to the island because of the oil production. The graph shows the crude oil market in Carribea. The social cost curve is currently identical with the private supply curve. Move the social cost curve to the appropriate position, assuming each barrel of crude oil costs Carribea $20 of tourism revenue. Next, place the DWL triangle to illustrate the deadweight loss caused by crude oil production at the private market equilibrium. Finally, place the consumer surplus (CS) and the producer surplus (PS) triangles on the graph using the socially efficient price and quantity as market equilibrium. Price of crude oil ($ per barrel) 145 135 ▲ DWL 125 social cost ▲ CS 115 ▲ PS 105 supply 95 85 75 65 55 45 8 2 2 2 2 988 35 25 15 0 1 2 3 4 5 6 7 8 9 10 Quantity of crude oil (millions of barrels) demand
The citizens of the island country of Carribea were thrilled to learn a major oil deposit was discovered not far off the coast. They were less thrilled when they realized drilling resulted in unsightly blobs of oil washing up on their pristine white beaches and that building derricks spoiled the view from the balconies of the expensive beachfront hotels. Before the oil boom, tourism was Carribea's major industry, but fewer tourists now come to the island because of the oil production. The graph shows the crude oil market in Carribea. The social cost curve is currently identical with the private supply curve. Move the social cost curve to the appropriate position, assuming each barrel of crude oil costs Carribea $20 of tourism revenue. Next, place the DWL triangle to illustrate the deadweight loss caused by crude oil production at the private market equilibrium. Finally, place the consumer surplus (CS) and the producer surplus (PS) triangles on the graph using the socially efficient price and quantity as market equilibrium. Price of crude oil ($ per barrel) 145 135 ▲ DWL 125 social cost ▲ CS 115 ▲ PS 105 supply 95 85 75 65 55 45 8 2 2 2 2 988 35 25 15 0 1 2 3 4 5 6 7 8 9 10 Quantity of crude oil (millions of barrels) demand
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The citizens of the island country of Carribea were thrilled to learn a major oil deposit was discovered not far off the coast. They
were less thrilled when they realized drilling resulted in unsightly blobs of oil washing up on their pristine white beaches and
that building derricks spoiled the view from the balconies of the expensive beachfront hotels. Before the oil boom, tourism was
Carribea's major industry, but fewer tourists now come to the island because of the oil production.
The graph shows the crude oil market in Carribea. The social cost curve is currently identical with the private supply curve.
Move the social cost curve to the appropriate position, assuming each barrel of crude oil costs Carribea $20 of tourism revenue.
Next, place the DWL triangle to illustrate the deadweight loss caused by crude oil production at the private market equilibrium.
Finally, place the consumer surplus (CS) and the producer surplus (PS) triangles on the graph using the socially efficient price
and quantity as market equilibrium.
Price of crude oil ($ per barrel)
145
135
▲ DWL
125
social cost
▲ CS
115
▲ PS
105
supply
95
85
75
65
55
45
8 2 2 2 2 988
35
25
15
0
1
2
3
4
5 6
7
8
9
10
Quantity of crude oil (millions of barrels)
demand
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