Explain the concept of negative externality

Reference no: EM133041969

Professional Assignment

Explain the concept of negative externality and answer the following questions.

Question 1. In the Land of Purity, there is only one form of pollution, called "gunk." Table 12-18 shows possible combinations of economic output and reduction of gunk, depending on what kinds of environmental regulations are chosen.

Combos	Eco Output	Gunk Cleaned Up
J	800	10%
K	500	30%
L	600	40%
M	400	40%
N	100	90%

a. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the percentage reduction of gunk, and with the quantity of economic output on the vertical axis.

b. Which choices display productive efficiency? How can you tell?

c. Which choices show allocative efficiency? How can you tell?

d. In the choice between K and L, can you say which one is better and why?

e. In the choice between K and N, can you say which one is better, and why?

f. If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice L or M? Why?

Question 2. The supply and demand conditions for a manufacturing firm are given in Table 12_04. The third column represents a supply curve without taking the social cost of pollution into account. The fourth column represents the supply curve when the firm is required to take the social cost of pollution into account. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.

Price	Quantity Demanded	Quantity supplied without paying the cost of pollution	Quantity supplied after paying the cost of pollution
$10	450	400	250
$15	440	440	290
$20	430	480	330
$25	420	520	370
$30	410	560	410

Reference no: EM133041969

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