A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plasticis, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward?

Question

Quizplus · Accepted Answer

The marginal external cost curve shifting upward means that the negative externality caused by the water pollution has increased. This will cause the socially optimal level of output to decrease (to Q2) and the optimal price to increase (to P2). So, the combination of the two changes (lower quantity and higher price) leads to a reduction in the social costs of production and consumption.

A Plastics Factory Emits Water Pollutants into a Nearby River