Suppose that an industry emits a chemical that pollutes the ground water. Without considering the effects of the pollution, the industry has a marginal private cost curve of MPC $= Q + 30$. The market demand curve is $P = 60 - Q$, while the marginal social cost curve is $\mathrm { MSC } = 2 \mathrm { Q } + 30$. What is the socially optimal emissions standard?

Question

Quizplus · Accepted Answer

The socially optimal emissions standard is found where the marginal social cost (MSC) equals the market demand curve (P), as this point reflects the true cost to society including externalities. Setting the MSC equal to the demand curve: $2Q + 30 = 60 - Q$. Solving for Q gives $3Q = 30$, so $Q = 10$. This means the socially optimal level of emissions is where the quantity is 10.

Suppose That an Industry Emits a Chemical That Pollutes the Ground