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Explanation of Solution
When a competitive industry sells pollution generating product, the price of the product will be lower and the quantity produced will be larger than the green industry. Externality cost incurred by the negative externality of the product is not included in the price of the product in the competitive industry. This implies that the price charged is lower than the actual cost and a lower price results in a higher quantity demanded of the product. However, the green industry includes the externality cost for pricing, and hence the price charged will be higher.
Externality: Externality is the benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
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Chapter 14 Solutions
Micro Economics For Today
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