ZAPCO Refinery is currently producing 100,000 barrels of refined oil per day. The marginal cost of this production is $40 per barrel and the marginal external cost is $30 per barrel. Suppose the marginal social benefit is $65 per barrel. In this case, ZAPCO is:

Question

Quizplus · Accepted Answer

ZAPCO's production imposes a marginal external cost of $30 per barrel, which is not accounted for in their private costs. The marginal social cost (sum of marginal cost and marginal external cost) is $70 ($40 + $30) per barrel, which is higher than the marginal social benefit of $65. This indicates that ZAPCO is producing too much from a social perspective, as the cost to society (including environmental harm) exceeds the benefit, suggesting they should cut back production to reach an efficient level.

ZAPCO Refinery Is Currently Producing 100,000 Barrels of Refined Oil