Marginal external costs and market efficiency

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Reference no: EM1315755

When peach canners process fresh peaches, they produce three products. The first, canned peaches, is sold in the market. The others, liquid and solid wastes, are by-products that must be removed. The liquid is sometimes temporarily kept in holding ponds and later released into a nearby stream or sewer. Liquid dumped in the stream represents a negative externality to downstream users. In the peach growing region, the marginal external costs of the canning process have been estimated as:

MEC = 0.000043Q

Q represents the output of canned peaches in cases per week. The marginal cost of canning peaches (ignoring MEC) is: MC = 2 + 0.000157Q

The inverse demand for canned peaches is given by: P = 9 - 0.000243Q

Prices and costs are in terms of dollars per case.

a) How many cases of peaches will be produced per week during the growing season, and what will the selling price per case be if producers ignore the marginal external costs imposed on others?

b) If producers are forced to incorporate the marginal external costs into their production decisions, what will the new production rate and selling price be?

c) In taking account of the external costs imposed on others (part b), what was the impact on the selling price and production rate of canned peaches? Explain the impact on market efficiency.

Reference no: EM1315755

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