ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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The marginal private cost of fertilizer production is MPC = 40 + Q, where Q is the amount of fertilizer produced. The marginal benefit (both private and social) of fertilizer is MB = 340 – 4Q. In addition to the private costs faced by producers of fertilizer, people who walk or drive past the area where the fertilizer is produced also face costs because of the horrible smell of the fertilizer; the marginal external cost generated by the fertilizer is MEC = 20 + 3Q.
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- How much fertilizer will be produced by the free market?
- What is the efficient quantity of fertilizer?
- Calculate the amount of
deadweight loss in this market, and explain what this number means. - Suppose that the government realizes that the current amount of fertilizer produced by the free market is inefficient and decides to correct this inefficiency by taxing the production of fertilizer. How large should the tax per unit of fertilizer be to induce the market to produce the efficient amount, and why would such a tax accomplish the goal of making the
market operate efficiently ?
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