An economic model for a local textile industry, which pollutes a river with a toxic dye, concludes that the socially optimal output is 5,000 units per month, significantly less than the current market output. The recommended policy is to tax textile production to force output down to this level. However, a new, non-polluting dye becomes available at the same cost as the toxic one. Given this new information, what is the primary flaw in the original model's policy recommendation?

Evaluating Policy with Technological Change

Critiquing an Economic Model's Recommendation

Critiquing an Economic Model's Recommendation

An economic model for a coal-fired power plant concludes that the Pareto-efficient level of electricity generation is 500 megawatts, due to the high social costs of air pollution. The model assumes the current polluting technology is the only option. Later, a new, equally cost-effective solar power technology becomes available that produces no air pollution.

Statement: In this new context, enforcing the 500-megawatt production limit on the power company is the most efficient policy to address the pollution problem.

Evaluating Policy Recommendations Based on Model Assumptions

A local factory's production process pollutes a nearby lake, negatively impacting a commercial fishery. An initial economic model, assuming the factory's current technology is the only option, recommends a policy to limit the factory's output. Subsequently, a new, cost-effective technology is introduced that completely eliminates the pollution. Match each concept from this scenario with its correct description.

An economic consultant is analyzing the negative externality of water pollution from a paper mill. The consultant's final recommendation is to limit the mill's output. Arrange the following steps to show the logical, but ultimately flawed, reasoning process the consultant used to arrive at this inefficient recommendation, especially if cleaner technologies were available.

Evaluating an Economic Model for Urban Congestion

An economic model for a city dealing with traffic congestion concludes that the most efficient solution is to limit the number of cars entering the downtown area. This policy recommendation is based on the critical, but potentially flawed, assumption that the current transportation ______ is the only one available. If a new, cost-effective public transit system could be built, the original recommendation to simply limit cars would be inefficient.