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 can be expressed as $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the net social benefit of producing at the social optimum (rather than at the private optimum) is

Question

Quizplus · Accepted Answer

At the social optimum, marginal social cost (MSC) = marginal social benefit (MSB).
From the given information:
MSC = 2Q + 30
This gives the equation for the supply curve.
MSB = P = 60 - Q = 60 - (MSC-30)/2 = 45 - Q/2
Equating MSB and MSC, we get:
2Q + 30 = 90 - Q
Solving for Q, we get: Q = 20
Substituting Q in the demand equation, we get: P = 40
Therefore, the social optimum is at Q = 20 and P = 40.
At this point, total surplus (consumer surplus + producer surplus + net social benefit) is maximized.
Consumer surplus at this point = (1/2) x (60-40) x 20 = $200
Producer surplus at this point = (1/2) x (40-30) x 20 = $100
Total surplus at this point = $300
At the private optimum, marginal private cost (MPC) = marginal private benefit (MPB).
From the given information:
MPC = MPC = Q + 30
MPB = P = 60 - Q
Equating MPB and MPC, we get:
Q + 30 = 60 - Q
Solving for Q, we get: Q = 15
Substituting Q in the demand equation, we get: P = 45
Therefore, the private optimum is at Q = 15 and P = 45.
At this point, total surplus (consumer surplus + producer surplus) is maximized. There is no net social benefit as the negative externality of pollution is not taken into account.
Consumer surplus at this point = (1/2) x (60-45) x 15 = $112.50
Producer surplus at this point = (1/2) x (45-30) x 15 = $112.50
Total surplus at this point = $225
Therefore, the net social benefit of producing at the social optimum (rather than at the private optimum) is:
Net social benefit = Total surplus at the social optimum - Total surplus at the private optimum = $300 - $225 = $75
But, this is only the net social benefit from the perspective of consumer and producer surplus. It does not take into account the negative externality of pollution. If the consultants have accurately measured the impact of the pollution externality, the net social benefit of producing at the social optimum (rather than at the private optimum) would be higher than $75 as the reduction in pollution would also have a positive impact on social welfare. Here, the closest option is C ($150).

An Environmental Economic Consulting Firm Is Hired to Measure the Negative