Suppose the market for oranges is perfectly competitive and unregulated.Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges.Suppose Q_D = 1000 - 100P and Q_S= -100 + 100P.The "optimal" amount of environmental damage would be A)$0 B)$40 C)$450 D)$500

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Quizplus · Accepted Answer

In a perfectly competitive market, the equilibrium quantity and price are determined by the intersection of the supply and demand curves. To find the equilibrium price and quantity, we equate Q_D and Q_S and solve for P. 1000 - 100P = -100 + 100P 200P = 1100 P = 5.5 At an equilibrium price of $5.5, the equilibrium quantity is: Q = 1000 - 100(5.5) = 450 With the given information, we know that each bushel of oranges causes $1 of environmental damage. Therefore, the optimal amount of environmental damage would be: $1/bushel x 450 bushels = $450 However, if the grower were to internalize the environmental cost of using insecticides, they would need to reduce production by the marginal cost ($1) until the social marginal cost is equal to the private marginal cost. This would result in an output of 410 bushels instead of 450 bushels, leading to an optimal amount of environmental damage of: $1/bushel x 410 bushels = $410 Note that $40 is the difference between the total cost of 450 bushels of oranges and the total cost of 410 bushels of oranges, which is the difference in the optimal amounts of environmental damage. Therefore, the best choice is B) $40.

Suppose the Market for Oranges Is Perfectly Competitive and Unregulated