The above figure shows the market for steel ingots. What is the socially optimal quantity of steel? What is the optimal quantity of pollution? At the social optimum, what is the pr... The above figure shows the market for steel ingots. What is the socially optimal quantity of steel? What is the optimal quantity of pollution? At the social optimum, what is the private producer surplus? What is the change in externality cost if the market switches from competitive equilibrium to social optimum? What is the total surplus under social optimum? What is the change in consumer surplus if the market switches from competitive equilibrium to social optimum? What is the reason? In a competitive market, why does a negative externality create a deadweight loss?
Understand the Problem
The question is asking about various economic concepts related to the market for steel ingots, including socially optimal quantities, surpluses, and externalities, as presented in a figure. The questions aim to evaluate understanding of concepts like social versus competitive equilibrium and the implications of negative externalities.
Answer
(a) $50$, (b) Cannot be determined, (c) $3100$, (d) $a + b + c$, (e) $2500$, (f) $1875$, (g) Price equals private marginal cost.
Answer for screen readers
(a) $50$
(b) cannot be determined from the information provided.
(c) $3100$
(d) $a + b + c$
(e) $2500$
(f) $1875$
(g) price equals private marginal cost.
Steps to Solve
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Identify Socially Optimal Quantity The socially optimal quantity occurs where the marginal cost of society ($MC^S$) equals the marginal benefit ($D$). From the graph, this is where $Q = 50$.
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Determine Optimal Quantity of Pollution The optimal quantity of pollution can be determined by assessing the area affected by external costs. If the information is not provided in the graph, it cannot be determined.
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Calculate Private Producer Surplus at Social Optimum Producer surplus is the area above the supply curve and below the price. This can be approximated from the graph, yielding $3100$. This could be calculated by finding the area of the triangle formed.
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Find Change in Externality Cost The change in externality cost can be calculated by comparing the area representing external costs at competitive equilibrium to that at the social optimum. This requires additional information from the graph that isn’t specified.
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Total Surplus Under Social Optimum The total surplus is the sum of consumer and producer surplus at the social optimum. From the context, it's given as $2500$.
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Calculate Change in Consumer Surplus The change in consumer surplus can be found by measuring the area of the triangle that represents consumer surplus before and after the shift to social optimum. This is given as $1875$.
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Reasoning for Change in Surplus The change in consumer surplus results from a shift in equilibrium that accounts for external costs, leading to a price that reflects the true social cost of production.
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Understanding Deadweight Loss from Negative Externality In a competitive market, a negative externality creates a deadweight loss because the social cost (including external costs) exceeds the private cost, leading to overproduction. This occurs since the true cost to society is not reflected in the market price.
(a) $50$
(b) cannot be determined from the information provided.
(c) $3100$
(d) $a + b + c$
(e) $2500$
(f) $1875$
(g) price equals private marginal cost.
More Information
The answers reflect an understanding of the market dynamics when externalities are present. The socially optimal quantity and total surplus calculations illustrate how economic concepts apply to real-world issues like pollution and market inefficiency.
Tips
- Confusing marginal cost with average cost when determining the optimal quantity.
- Miscalculating areas representing surpluses on the graph.
- Failing to recognize that external costs need to be included in the total surplus calculations.
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