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 $M P C = Q$ +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 find the point where MSC equals the demand curve (because at that point, the marginal benefit to society will equal the marginal cost to society), which is:
2Q+30 = 60-Q
Solving for Q, we get Q = 10.
So the social optimum is for the industry to produce 10 units.
At this level of production, the market price (P = 60-Q) would be $50.
Now, we need to compare this to the industry's current level of production, given their marginal private cost (MPC) curve of Q+30.
To find their current level of production, we need to set MPC equal to the demand curve, since that is where they will produce in a competitive market (where price equals marginal cost for firms). So:
Q+30 = 60-Q
Solving for Q, we get Q = 15.
So the industry is producing 15 units.
The difference between the social optimum and the industry's current level of production is 5 units, so the industry is over-producing by 5 units. Therefore, the answer is B.

An Environmental Economic Consulting Firm Is Hired to Measure the Negative