Calculate the marginal external cost – Microeconomics
Environmental Economics Assignment
Q1. A’s utility function is give as U = (x1)α(x2y)(1- α) where y is the consumption of the B which creates externality for A. What type of externality does y create for A, positive or negative?
Q2. Given the Marginal Social Cost (MSC) as MSC = 40.0 + 0.25Q and Marginal Private Cost (MPC) as MPC = 40.0 + 0.14Q, calculate the Marginal External Cost (MEC) associate with the production externality.
Q3. The market for a public good is comprised of two consumers, 1 and 2, who have individual demands of p1 = 100 – 0.2QD and p2 = 250 – 0.5QD. Calculate the market demand function.
Q4. The inverse market demand and supply curves for a pesticide are given by:
Inverse demand: P = 23 – 2Q
Inverse supply: P = 3 + 3Q
Q is measured in thousands of tons, and it is possible to produce fractions of a ton.
a) If the pesticide market is perfectly competitive and there is no externality, calculate and graph the equilibrium price, quantity, and total welfare.
b) Suppose that use of the pesticide also damages nearby water sources as it runs off of the farmland it is applied to. The marginal external cost (MEC) is a constant $6 of production. Derive and graph the allocative efficient level of pesticide consumption when this externality is present. Calculate and graph total welfare, which now recognizes the environmental cost, at the allocative efficient output level.
c) Calculate and graph the welfare gain to society of moving from the competitive to the allocative efficient level of pesticide production when the externality is present.
Q5. There are three groups of consumers in our community. Their marginal benefit or willingness to pay (P) curves for hours of television programming (QD) on KDKA are given by:
P1=150 – QD; P2=200 – 2QD; P3=250 – QD
Suppose that KDKA programming is a pure public good that can be produced at a constant marginal cost of $200 per hour.
a) Construct the MSB curve (WTP has a lower bound of zero and cannot be negative) by using a carefully constructed graph (Please label the axes, lines, and points clearly).
b) What is the efficient number of hours of KDKA programming for our community? Show that at this efficient number of hours the consumer’s willingness to pay will cover the cost of $200. Will this amount of programming be provided?
c) Assume that KDKA is a private good, instead of it being pure public good. Drive the MSB (demand curve) for the KDKA market and graph it (Please label the axes, lines, and points clearly).
