Download Negative Externalities Homework

Externalities Homework #1 (Negative)
Guided Example:
ABC Plastics is polluting the ground water surrounding it’s factory. The Gov’t decides to tax their
product and use the $ to treat the area. Graph the externality including the tax.
Homework:
The graph below Steel – Supply and Demand, only shows the private costs and benefits.
1. Draw the new supply curve and show the new equilibrium price and quantity for steel if the external
costs of pollution were also counted as costs of production. Add “= MPC” and “= MPB” to change the
labels for S&D. Add m to P and Q to change them to market P&Q.
2. Would the market (private) Q be called an over or under allocation? ______________
3. Would more or less steel be produced according to the new equilibrium? ___________
4. Would the price be higher or lower according to the new equilibrium? ________________
5. Give one possible reason you think products that entail third party costs are “over produced”
6. List one possible solution to correct the problem and add it to the graph.
7. Imagine that you are on the Senate committee debating possible solutions for correcting the steel
company’s pollution problem. The debate is over whether to establish a price floor or a tax on the
product. Which solution would you choose and give at least one reason why.
8. Exterminex, a pesticide company is polluting the ground water of the community surrounding
their production plant. Graph the market for Exterminex pesticide including the negative
externality.
Answers: