- The runoff from agricultural fertilizers contains compounds that
damage local watersheds. Suppose the private marginal costs of
production and the demand (marginal benefit) in the market for
fertilizer are as follows:
The social marginal cost of production is:a. What level of output will be produced in a competitive
free market?
b. What is the allocatively efficient level of output?
c. What is the marginal external cost at the competitive free-
market equilibrium?
d. What is the marginal external cost at the allocatively
efficient level of output?
e. What level of emissions tax ($ per unit produced) would
lead to the allocatively efficient level of output?
15. Suppose there are only two firms—Softies Inc. and Cuddlies Inc.—
producing disposable diapers. Both firms are releasing dioxins
into the same river. To reduce the pollution, the regulatory
agency must choose between using direct regulatory controls and
emissions taxes. The following diagrams show each firm’s
marginal cost of pollution abatement.
MCP = 20 +0.5Q
MB = 50 −0.25QMCS= 30 +0.75Q