ECON 2302 Project

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School

Richland Community College *

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1301

Subject

Economics

Date

Jan 9, 2024

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docx

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Uploaded by MagistrateThunderKangaroo34 on coursehero.com

ECON 2302 Project 1. What is a negative externality? Construct a graph for the market for Steel showing the market price and quantity when the firms are dumping their industrial waste in the local waterways. What is the motivation for firms to pollute the local waterways? A negative externality happens when a product and/or the consumption of a thing or service has an adverse effect on a third party who is unrelated to the transaction. We notice a negative externality in this case since the firm is diminishing the well-being of another individual who is not rewarded by this firm. In this instance the supply curve = Private marginal cost (PMC) which refers to the direct cost to producers of steel of producing an incremental unit of steel, the demand curve (D) = private marginal benefit = social marginal benefit. When the demand curve intersects the supply curve, equilibrium will be established. 2. Explain how third parties are adversely affected from the pollution and how the negative externality can be internalized. Draw into the graph the appropriate shift of the supply curve which will remedy the negative externality and bring about the socially optimal level of output. If the manufacturing of an item causes a negative externality, in this case the manufacture of steel, then the cost to society of that good becomes greater than the cost paid by the customer. When a consumer's marginal cost equals their marginal benefit, the market becomes inefficient since the consumer does not pay the expense of negative externality. Individuals living near the industry or near local rivers where firms dump their waste will pay for the pollution in the form of greater medical bills, a lower quality of life, and so on. The negative externality can be internalized by putting a tax on the good that generates the negative externality, and this taxing can raise the price of the good to the true cost of production, including the cost of externality. In the above diagram, the supply curve shifts rightward and as a result, the socially optimal level of output is found out where the social marginal cost becomes equal to private marginal benefit. As you can see the social optimal quantity (Q2) is less than free market outcome (Q1).

3. What is a positive externality? Construct a graph for the market for vaccine shots showing the market price and quantity. Positive externality exists when the production and consumption of a certain commodity benefits a third party (not the buyer or seller of the commodity) who is not directly involved in the market transaction that generates this externality. The market for vaccine shots is depicted in the diagram below. The market equilibrium price and quantity are set where market demand crosses market supply. Pmarket is the equilibrium price, and Qm is the quantity.

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