A chemical plant's production process generates a constant marginal external cost (MEC) of $12 for each unit produced due to water pollution affecting a local fishery. The plant sells its product in a competitive market at a price (P) of $30 per unit. The table below shows the plant's marginal private cost (MPC) for its final units of production. Assuming the plant and the fishery can negotiate costlessly, at what level of output will they agree to stop production to maximize their combined welfare?

Negotiating an Optimal Production Level

Optimal Output with Externalities

A paper mill sells its product for $100 per ton. For the last ton it currently produces, its marginal private cost is $85, and the marginal external cost from pollution is $20. A negotiation to reduce production by this last ton would be mutually beneficial because the marginal external cost ($20) is greater than the marginal private cost ($85).

Negotiating Pollution Reduction

A factory's production process creates a negative externality with a marginal external cost (MEC) of $15 per unit. The factory sells its product for a price (P) of $50 per unit. The table below lists the marginal private cost (MPC) for four of the factory's final units of production. Assuming the factory and the affected community can negotiate without cost, arrange the units of output that would be eliminated in the order they would be removed, starting with the unit that offers the greatest potential for mutual gain from its elimination. Note: Not all units listed may be eliminated.

A factory's production process creates pollution that harms a local community. For three different units of output, the market price (P), the factory's marginal private cost (MPC), and the marginal external cost (MEC) imposed on the community are listed below. Assuming the factory and community can negotiate without cost, match each production scenario with the correct negotiation outcome.

The Negotiation Process for Optimal Output Reduction

A factory produces widgets sold at a market price (P) of $50 each. The production process creates a constant marginal external cost (MEC) of $18 per widget. The table below shows the marginal private cost (MPC) for the factory's final four units of production. Assuming the factory and the affected parties can negotiate costlessly to reach the socially optimal output level, the producer's surplus (P - MPC) from the very last widget produced will be $____.

A factory sells its product for $50 per unit. For the 100th unit it produces, its marginal private cost is $35, and the marginal external cost from pollution is $10. In this situation, a costless negotiation between the factory and the affected community would result in the elimination of this 100th unit of production.

A paper mill sells its product for $100 per ton. For the last ton it currently produces, its marginal private cost is $85, and the marginal external cost from pollution is $20. A negotiation to reduce production by this last ton would be mutually beneficial because the marginal external cost ($20) is greater than the marginal private cost ($85).