An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be +30. The market demand curve for the industry can be expressed as P = 60-Q. If the industry currently does not take into account the negative externality in its supply decisions, the industry is ________________ by _____________ units relative to the social optimum.

Question

Quizplus · Accepted Answer

To find the social optimum, we need to equate the marginal social cost and the marginal social benefit. In this case, the marginal social benefit is equal to the market demand curve, which is P = 60 - Q.

Equating MSC and MSB, we get:

2Q + 30 = 60 - Q

Solving for Q, we get Q = 10.

Therefore, the social optimum output is 10 units.

However, the industry is only taking into account the marginal private cost, which is +30. Equating MPC and MSB, we get:

30 = 60 - Q

Solving for Q, we get Q = 30.

Therefore, the industry is currently producing 30 units.

The difference between the social optimum and the industry output is:

10 - 30 = -20 units.

Therefore, the industry is over-producing by 20 units relative to the social optimum.

Since the question asks for the difference in output in units relative to the social optimum, we take the absolute value of -20, which is 20. Then, we divide by 2 to get the difference in output in units relative to the social optimum: 20/2 = 10.

Therefore, the industry is over-producing by 10 units relative to the social optimum.

The closest answer choice is B: over-producing by 5 units, but the correct answer is over-producing by 10 units.

An Environmental Economic Consulting Firm Is Hired to Measure the Negative