Economy

Written Assignment Instruction

· Answers must be type-written, except for the graph or mathematical equation.

· The Learning Module has a Tutorial about submitting graph. Please read from there.

· Work submitted before Friday will allow re-do and resubmission to get more points.

· Re-do is due the same time as the assigned module Monday. That’s why early submission before Friday will allow time for me to grade your work and give you time to re-do and re-submit before the due time Monday.

· Work submitted after Thursday of the assigned week will be graded on the following week; no re-do is available after due date grading.

· The due date and time is 12pm Monday on the assigned week. After 12pm noon, submission would be counted as late work (read make-up policy in the Syllabus).

· When answering the problems, students need to provide explanation to their answers, and provide mathematical work when solving math questions. If there is no explanation or calculation work, the answer will receive zero points.

Ch.12 – Negative Externalities (8 points total)

This problem is matching learning objectives of sections 12.1 identifying equilibrium price and quantity of a market with negative externality and the equilibrium after paying the external cost.

Suppose you know the demand and supply of fertilizer in your local market. You have graphed them as shown in the graph below. The fertilizer factory that operates in your town is producing pollution. You estimated the external cost of the pollution is $40 on each ton of fertilizer produced.

$

The value s on the ver tic al axis are the price s of fertilizer (price per ton ) in the market . The value s on the horizonta l axis are the qu antities of fertilizer in the market.

1. What is the market output level and price? (1 points)

2. Draw the social cost curve on the graph after including the external cost of pollution. (2 points)

3. Label the socially optimal output level and price on your graph (you may need to estimate the numbers). (2 points)

4. Compare the socially optimal output level and price to the market output level and price, what do you find out about the changes of quantity and price, and why. (2 points)

5. Suppose the government levied a per-ton tax on production. How much should this tax be to internalize the external cost? (1 points)