Determining the Optimal Extent of Output Reduction
To determine how much production should be reduced to address a negative externality, the condition for mutual gain (MEC > P - MPC) is applied repeatedly. The negotiation process of reducing output should continue as long as the marginal external cost of a unit is greater than the producer's surplus from that same unit. The optimal level of reduction is achieved when this condition no longer holds, at which point the potential for further mutual gains through negotiation is exhausted.
0
1
Tags
Library Science
Economics
Economy
Introduction to Microeconomics Course
Social Science
Empirical Science
Science
CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
Related
Marginal Analysis of a Potential Pareto Improvement at 80,000 Tons of Bananas
Decision Rule for Reducing Output When Price is Below Marginal Social Cost
Evaluating a Potential Production Agreement
A chemical factory produces a product that sells for $100 per unit. The factory's marginal private cost for the last unit produced is $70. The production of this last unit creates pollution that causes $40 in damages to a nearby farm. Based on this information, which of the following statements correctly analyzes the potential for a mutually beneficial agreement to reduce output by this one unit?
A steel plant's production of its final ton of steel for the day generates $1,200 in revenue. The private cost to the plant for producing this ton is $1,150. This same ton of production releases pollutants that cause $60 in health and environmental damages to the local community. Based on this information, a mutually beneficial agreement can be reached where the community pays the plant to not produce this last ton of steel.
Determining the Bargaining Range for an Externality
Explaining the Conditions for a Mutually Beneficial Agreement
A factory's production process generates a negative externality for a nearby community. The factory sells its product at a market price of $150 per unit, and its marginal private cost for the last unit produced is $110. For a mutually beneficial agreement to be reached where the community compensates the factory to reduce its output by this last unit, which of the following conditions must be met?
A factory's production process creates a negative externality affecting a local community. To determine if a mutually beneficial, private agreement to reduce output by one unit is feasible, several key values must be compared. Match each analytical component below with its correct description in this context.
Negotiating an Externality Agreement
Calculating the Threshold for a Mutually Beneficial Agreement
A paper mill sells paper at $500 per ton, with a marginal private cost of $420 for the last ton produced. This production causes $120 in damages to a downstream fishery. For a mutually beneficial agreement to be reached, the fishery must pay the paper mill an amount greater than the mill's lost profit but less than the fishery's gain from the reduction. The maximum amount the fishery would be willing to pay to prevent the production of this last ton is $____.
Determining the Optimal Extent of Output Reduction
Learn After
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?
Unit of Output Price (P) Marginal Private Cost (MPC) Marginal External Cost (MEC) 10th $30 $15 $12 9th $30 $17 $12 8th $30 $18 $12 7th $30 $20 $12 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.
Unit Label Marginal Private Cost (MPC) A $32 B $48 C $38 D $41 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 $____.
Unit of Output Marginal Private Cost (MPC) 100th $35 99th $33 98th $31 97th $29 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).