Externalities
Question 1
A steel manufacturer is located close to a large town. During production
it emits sulphur which creates an external cost to the local community.
The private costs of production and the private benefits to steel
buyers, who are mainly cars producers, are shown, along with the
estimated external costs.
|
Quantity of Steel (m tonnes) |
Price car makers are prepared to pay, based on expected private benefit (£) |
Price steel makers
are prepared to receive, based on their private
production costs (£) |
Estimated external costs to
society of pollution
(£) |
| 1 | 10000 | 1000 | 1000 |
| 2 | 9500 | 2000 | 1500 |
| 3 | 9000 | 3000 | 2000 |
| 4 | 8500 | 4000 | 2500 |
| 5 | 8000 | 5000 | 3000 |
| 6 | 7500 | 6000 | 3500 |
| 7 | 7000 | 7000 | 4000 |
| 8 | 6500 | 8000 | 4500 |
| 9 | 6000 | 9000 | 5000 |
-
Draw a graph to show market price and quantity and plot the effects of including external costs. Show the socially efficient output of steel.
-
Show the area of net welfare loss on your graph.
-
What remedies could the authorities employ to deal with the problem of external costs?