Sketch graph showing externality and loss in the market

Reference no: EM13455995

The most common technology used for dry cleaning clothing uses toxic substances that, if disposed of in drains, will contaminate the water supply and cause brain damage in some people. The cost to society of these health effects has been estimated to be about 35 cents per item of clothing cleaned this way. A clean technique has been invented, that adds 22 cents to the average cost of production. It has only been adopted by 2 firms. Assume that this is a competitive market.

a. Describe the externality in this situation.

b. What would be the most efficient technology to use (from the economic perspective)?

c. Explain why this market will NOT be allocatively efficient (why it will not produce the output with the most surplus).

d. Draw a graph showing the externality and the loss in the market.

e. Describe a policy that could be used in an attempt to internalize the externality.

f. Describe a second policy that might also be used and briefly compare the pros and cons of each policy (based on the reading.)

Reference no: EM13455995

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