Learn Before
Cessation of Production when Marginal Social Cost Exceeds Market Price
When the external costs of a production method are exceptionally high, its marginal social cost (MSC) can exceed the market price for any level of output, making the socially optimal output zero. In such cases, a complete ban is the most appropriate policy. This was the eventual outcome in the chlordecone case, where the French government, after a long delay, banned the pesticide in 1993, implicitly acknowledging that its MSC was too high to justify any level of use.
0
1
Tags
Social Science
Empirical Science
Science
CORE Econ
Economy
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
Related
Distributional Outcome of Mandated Compensation
Graphical Representation of Mandated Compensation in the Banana Market (Figure 10.5)
Mandated Compensation as an Incentive for Cleaner Production Methods
Cessation of Production when Marginal Social Cost Exceeds Market Price
Hypothetical Compensation to Correct the Price of Driving
Legal Liability as a Mechanism to Internalize Externalities
Calculating Costs Under a Compensation Policy
A large-scale farming operation uses a pesticide that runs off into a nearby lake, harming the local tourism industry that relies on recreational fishing. In response, the government implements a policy requiring the farm to pay the local tourism board a fee for each gallon of pesticide used, with the fee calculated to be equal to the estimated economic damage to tourism. What is the most direct and intended economic consequence of this policy for the farming operation?
Mechanism of Mandated Compensation
Policy Evaluation: Compensation vs. Regulation
True or False: When a government mandates that a producer pays compensation exactly equal to the marginal external cost of its production, the producer's effective marginal cost of production becomes equal to the marginal social cost.
A chemical factory's production process releases a pollutant into a river, which reduces the catch of a downstream commercial fishery. The government decides to intervene by requiring the factory to pay compensation to the fishery for the damages. To achieve the socially efficient level of chemical production, how should the per-unit compensation payment be calculated?
Arrange the following events in the correct order to illustrate the economic impact of a government policy that mandates compensation for an externality.
A factory's production process creates water pollution that harms a downstream fishery. To address this, the government requires the factory to pay the fishery an amount for each unit produced that is exactly equal to the damage caused by that unit. Match each economic term to its correct description within this scenario.
Under a government policy that requires a producer to compensate for the harm caused by a negative externality, the per-unit payment must be equal to the difference between the Marginal Social Cost and the ____ in order to achieve the socially efficient level of output.
Firm Behavior Under Extreme External Costs
Comparison of Distributional Outcomes: Mandated Compensation vs. Corrective Tax
Reducing Chlordecone Use Through Mandated Compensation
Learn After
A factory produces a chemical dye that sells for a stable market price of $80 per barrel. The factory's private cost for producing each barrel is $50. However, the production process contaminates a local river, causing an estimated $35 of damage to the local ecosystem and fishing industry for every barrel produced. Considering all costs, what is the socially optimal production decision and why?
Socially Optimal Production Level for a Power Plant
Evaluating Subsidies in High-Externality Industries
A manufacturing process generates a product that sells for $100 per unit. The private cost to the company is $80 per unit. However, the process also creates pollution that imposes a cost of $25 per unit on the surrounding community. Given this information, it is true that from society's perspective, this product should not be produced at all.
Economic Analysis of a New Mining Technique
A government is analyzing the production of three different goods, each with an associated external environmental cost. Match each production scenario with its socially optimal outcome by calculating the marginal social cost (private cost + external cost) and comparing it to the market price.
A chemical fertilizer has a market price of $40 per bag. The private cost of production is $25 per bag, and the production process creates an additional $20 per bag in environmental damage costs. From a social welfare perspective, the optimal level of production for this fertilizer is ______.
You are an economist advising a government agency on the regulation of a new agrochemical. The chemical is effective but is suspected of causing significant harm to local water systems. Arrange the following steps into the correct logical sequence to determine if, from a social welfare perspective, production of this chemical should be stopped entirely.
Economic Rationale for Product Prohibition
Evaluating Policy for a High-Externality Product