Asked by Suman Chahal on May 09, 2024
Verified
A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plastics, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward?
A) Optimal price and quantity decrease.
B) Optimal price increases, optimal quantity remains unchanged.
C) Optimal price increases, optimal quantity decreases.
D) Optimal price and quantity decline.
Marginal External Cost
The cost of producing one additional unit of a good or service that is borne by people other than the producer, often not reflected in the product's market price.
Socially Optimal
A state or outcome in which resource allocation maximizes social welfare, considering all costs and benefits to society.
Market Price
The current price at which an asset or service can be bought or sold, determined by supply and demand.
- Understand the function of governmental policies in realizing outcomes that are socially optimal when externalities are present.
- Ascertain the socially ideal quantity and price levels for products within markets experiencing external costs.
Verified Answer
AK
Andrew KallahMay 14, 2024
Final Answer :
C
Explanation :
If the marginal external cost curve shifts upward, it means the cost of the pollution has increased, and the current quantity of production is creating even more negative externalities. This will lead to a decrease in the socially optimal level of output. In order to reduce the negative externality, the market will require a higher price to discourage producers from producing as much. Therefore, the optimal price of plastics will increase, and the optimal quantity will decrease.
Learning Objectives
- Understand the function of governmental policies in realizing outcomes that are socially optimal when externalities are present.
- Ascertain the socially ideal quantity and price levels for products within markets experiencing external costs.