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 plastics, 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

If the marginal external cost curve shifts upward, it means the cost of the pollution has increased, and the current quantity of production is creating even more negative externalities. This will lead to a decrease in the socially optimal level of output. In order to reduce the negative externality, the market will require a higher price to discourage producers from producing as much. Therefore, the optimal price of plastics will increase, and the optimal quantity will decrease.

A Plastics Factory Emits Water Pollutants into a Nearby River