The Efficient Pollution Control Regulatory System - Essay Example

Part Short Answer Questions 1a) Opportunity cost refers to the value of the of the next best alternative forgone (i) The opportunity cost in the case is the compensation that an employed person receives for two hours per week. An employed person have trade-off between leisure time and working time, therefore if a person opts to work for lesser hours he or she spend more leisure time. In this case if a worker does not work he or she won’t receive compensation. Therefore, when an employed person works for lesser hours the cost foregone is the compensation that one would have received for working for such time (Baumol and Blinder 27). (ii) The opportunity cost in this case is interest forgone. If the employed person had deposited the money in a bank account or invested in government security, he would have received interest on the money. By holding the money the employed person only incurs holding cost. Therefore, in this case the interest that an employed person would have gained from $1000 is the opportunity cost(Stapleford, 67). (iii) The employed person either consumes his income or saves. Therefore, an employed person must have a trade-off between savings and consumption. In this scenario consuming a glass of wine costing $ 7, is consumption of a luxurious good. If the employed person had saved the money he or she could have increase his or her wealth stock. Therefore, the opportunity cost in this case is saving the $7 instead of consuming it on glass of wine(Stapleford, 67) 1b i) when the wheat price increase, this increases the cost of inputs needed in production of bread. Assuming that the firm has fixed budget for inputs used in production therefore the firm will end up producing smaller quantities of bread as compared to before. The net result of increase in wheat prices is the shift of the supply to the left or inward. Price of bread S1 D S0 P1 E1 E0 P0 S1 S0 D 0 Q1 Q0 Quantity of bread From the above diagram an increase price of wheat will cause the supply function to shift from S0 S0 to S1 S1 this result to a decrease in the amount of bread supplied in the market from Q0 to Q1, a decline in the amount of bread supplied in the market holding all other factors constant leads to an increase in price of bread as delineated in the diagram above by an increase in price of bread from P0 to P1 , this result to a new equilibrium in the market E1. (ii) Complementary goods are that usually consumed together (jointly consumed goods). In the case of Complementary goods when the demand r the price of the other good is decreased. Bread and butter are complementary goods, therefore they exhibit a cross elasticity of demand so when the price for margarine and butter is increased it result to a decrease in demand of bread causing a inward shift of the demand curve thus the quantity of bread demanded falls. PRICE D1 D0 S P2 P1 D0 D1 0 Q1 Q0 QUANTITY BREAD From the above diagram an increase in price of butter and margarine will cause shift the demand curve of bread from D0 D0 to D1 D1. This results in a decline in the amount of bread demand illustrated by a shift by the demand curve. ii) In the case of increase in the price of potatoes, rice and pasta, these could are not related in any way. Therefore, they would not result in influencing an increase in the quantity of bread demand or supplied since these goods are not related in way. This can be illustrated by the diagram below. Price D0 S0 P0 S0 D0 Q0 Quantity From the above diagram, an increase in price of rice, potatoes and pasta does not in way affect the quantity of bread demand or supplied. Q2. A) A graph illustrating shortages causes by price controls. price DB DA S $4 $3 DB S DA 0 QS Q* QA QB Quantity In the above diagram when the price of a kilo of banana is $4 the quantity demanded is Q, that is where the demand is equal to the quantity supplied. When the price is fixed at $3 per kilo of banana the quantity supplied is Qs, while the quantity demanded is QA and QB for both cities A and B respectively. City has the, highest maximum price elasticity of demand implying that the demand of city A is more steeper than the demand curve of city B as illustrated in the diagram. When the price is fixed at $3 there will be shortages, for city A shortage will be equal to 0 QA -0 QS while for city B the shortage will be equal to 0 QB -0 QS. From the diagram it evident that (0 QB -0 QS)> (0 QA -0 QS), therefore the shortages experience in city are larger than in city A. 2b) i) A fee paid to an advertising agency is fixed cost; this is paid once annually and does not depend on the quantity of produces that the shoe manufacture produces. Advertising is a sunk cost. ii) Electricity for heating and lighting has both characteristics of fixed cost and variable cost. It can be categorized as variable costs since the consumption of electricity will partial depend on the manufacturing of the shoe manufacturer. It can be categorized as a fixed cost since, the energy companies usually charge a fix charge whether one consume electricity or not. Therefore, this cost be classified as a fixed and at the same time as a variable cost. iii) Basic minimum wage is will have to be paid no matter the quantity of the shoes the shoe manufacture produces. Therefore, this a fixed cost. iv) Depreciation of machine pure on the ages is fixed cost since not matter the production rate time will have to elapse, therefore this a fixed cost. 3(a) Quantity Price Total revenue = price x quantity Average revenue Marginal revenue Total cost Marginal cost Average cost Profit = Total revenue- Total costs 0 12 0 ­­­­­­­­­0 - 2 - 0 -2 1 11 11 11 11 6 4 6 5 2 10 20 10 9 9 3 4.5 11 3 9 27 9 7 12 3 4 15 4 8 32 8 5 16 4 4 16 5 7 35 7 3 21 5 5.2 14 6 6 36 6 1 28 7 4.7 8 7 5 35 5 -1 38 10 7.6 3 A diagram to illustrate the profit maximizing output From the above table and diagrams it s evident that the profit maximizing output is 4 units. 3(b) price Marginal cost Average total cost P arbnormal profits D=MR=AR Production cost normal profits included Q Quantity An increase in demand for a perfect competitive industry The demand curve for a perfect completive market is perfectly elastic an increased demand can be caused by changes in preferences and an increase in consumer wealth. Increased demand causes a shift in the marginal cost and average cost curve thus moving downwards making the firm to achieve abnormal profits .high prices leads to abnormal profits for the firm. 4 (a) A monopolistic competitive industry adjusts the firm size to maximize profits. Therefore the entry and exit of industries in the market ensures that each market gets nothing more than the normal profits MC(shortrun) P a b AC(shortrun0 AC c d AR MR Qs The short run equilibrium of a industry under the monopolistic market is demonstrated by A fall in demand on the firm price and profit causes the average revenue curve and the marginal revenue to shift downwards his in turn leads to reduction and elimination of abnormal profits exhibited in section (abcd) Price LRMC P* LRAC AR=D(longrn) MR(LONGRUN) Q* Quantity In the long run equilibrium the firm produces when MC=MR however here is a shift in the demand curve as other industries get n the market .a fall in demand on the firms price and profit will cause the AR and MR curves to shift downwards leading to losses in the firm this will be as result a fall in prices at the same quantity 4(b) (i) The profit maximizing level of the firm is at 7 units, this where the price is equal to the marginal cost. (ii)the socially efficient level of output is at 5 units, this where the price is equal to the marginal social cost. (iii) The marginal pollution cost s directly proportional to the number of units produced an increase In output increases the marginal pollution cost PART B Question 1: What is the significance of the observations made by the author Catherine Hockley in her article regarding market failure and pollution: ‘Be Warned: Pollute and Pay the Price’ about the stormwater pollution? Why does the author suggest that polluters should pay the price for polluting? Many firms pollute the environment in the course of their production; this gives rise to negative externality to the society. A negative externality is an additional cost to the society due production activities of the firm, since many individual belief that stormwater is clean for human consumption, therefore, if an individual consume this water which combined with water that has been used to clean machines and equipment then there are likely to get sick. When individuals fall they have to seek medical attention thus incurring huge medical bills. Therefore, pollution of storm water negative contributes to the society. The company polluting the stormwater on the other hand enjoys returns emanating from their production activities without considering the cost that they pass on to the society when pollute the environment t(Haley, 121) In addition to this pollution of storm water, depletes the amount of water available for human consumption therefore individuals have to search for other alternative sources of water which are not expensive but water becomes scarce. This represents an additional cost to the society occasioned by the production activities of the firm (Haley, 131) Therefore in order to minimize the amount of pollution of our environment the government needs to intervene so as to reduce amount emission that the firm releases to river as well as other air. The best method to caution the society from the externalities is by charging the polluting firms a standard fee that would go towards financing the affected individuals in circumstances like subsidizing their medical or treatment of the polluted water. Introduction of laws that would require firms which pollute the environment to pay. This would be essential, since firms are supposed to be in the frontline of preserving the environment, therefore, they have to pay when pollute the environment. Apart from this, the polluting company should compensate the society for the cost incurred from their production activities. When the firm is calculating the total cost of production they omit the environmental cost, that is the marginal cost charged by the firm is, not socially efficient since they do not incorporate the damage that they cause to the society. Therefore, by omitting the social cost there cause the market fails. This can also be supported by economic theory where the presence of externality causes the market to fail. The act of imposing a fee to the polluters will reduce the amount pollution done by a firm, if were to buy license so that they can be allowed to pollute the environment the firm incurs cost which are considered in the computation of marginal cost. Therefore incorporation of social in the cost of production of the firm results into a socially optimal price that corrects the markets failure (Haley, 143). . Question 2: Why do people allow pollutants to enter storm water drains when they know they can cause serious environmental damage? Illustrate and explain this negative externality caused by storm water pollution. People are ignorant of the activities of the pollutant. The society in many cases does not monitor the activities of the organization polluting the storm water drains. The firm with that the knowledge that the society does not monitor the activities of the organization release the contaminated water to the storm water drains. Lack of proper legislation to govern the environmental conservation, in many cases there are no proper rules governing environmental pollution. In stance where such laws have been development, there is reluctance by the authority mandated to implement and operationalise such rules and procedures. Therefore, the society will not have power to restrict such firms from realizing effluents to the storm water drain (Baumol and Blinder 121). Amount of pollution that a firm causes is directly proportional to the quantity of products produces by such firms, therefore, if the society was to restrict the pollution by such firms this would mean that the firm will reduce it production activities. This would in turn mean reduced quantity supplied in the market thus the price of quantity increases. Another factors that causes individuals to reluctantly accept pollution by the firms number employees that would have to laid off in the event that the firm .reduces it production activities this would in turn increases the unemployment of rate in an economy, thus deterioration of living standards of the society. In this case we have established pollution as negative externality, when a firm is producing its effluents to the water it polluting the water and thus adding additional cost to the society. In this case a negative externality can be illustrated in the graph below, Price S(all cost incorporated)= MSC Ps S (private only) P Qs Qp Quantity In the above diagram the marginal social curve is above the firm supply as illustrated. This implies that the firm is not incurring all it cost, thus it offers its product to the market at P instead of Ps, since some of the costs are borne by the society thus if the firm to incur all cost that would mean that the marginal social cost would be equal to the supply curve of the firm thus producing quantity Qs instead Q p and charging price Ps. Question 3: Apply marginal-cost and marginal-benefit analysis to illustrate and explain how the system of fines and pollution taxes impact on the level of pollution. As discussed above pollution is directly proportional to the quantity produced. In the case of the negative externality (pollution of water) the marginal social cost is above curve the marginal private cost curve. As illustrated below, thus the firm produces more thus charging a lower price denoted as P. This can attribute to the fact that the firm is not incurring all the cost but some of the costs are borne by the society (Pirayoff 132) Price MSC Ps (tax)=(damage) MPC P Qs Qp Quantity If the government introduced taxes and fines then this would make the firm marginal private cost curve to shift to match the marginal social cost curve thus correcting the element of market failure occasioned by the presence of a negative externality. This is represented by the shift of the MPC to MSC, but this can only happen if assume that the taxes of pollution fines imposed should be equal to the cost of damages caused by the firm. Marginal social benefit analysis In the case of the firm a negative externality is beneficial to the firm since it does not meet all the cost, since some of the costs were borne by the society. Therefore the marginal private benefit cost curve is higher than the marginal social benefit costs. price MPB MSB P Ps Qs Qp Quantity If the government introduces pollution fines and taxes this would cause the MPB to shift to MSB. When taxes are introduced the firm now has to reduce it revenue arising from the production, since the firm has to pay the pollution fines and taxes. This reduces the marginal private benefits (Pirayoff 137). As illustrated in both cases the quantity of god produces decreases significantly from QP to Qs. as discussed above the rate of pollution is directly proportional to the amount of good produced. Therefore, a decline in quantity produced leads to decline in pollution. The overall result of the introduction of pollution fines and taxes is the production point of the firm is at point where the marginal social cost curve is equal to the marginal social benefit curve. Price MSC Ps MSB Qs Quantity Question 4: Would the most efficient pollution control regulatory system necessarily ensure that there would be zero pollution? Illustrate and explain your answer. There no evidence that the pollution can be zero. Pollution can only be zero at an ideal world. Ronald cease postulated only of the most effective ways to manage pollution where he argued that firms have to pollute in order to produce but at the same time the society is entitled to a clean environment therefore, the best way is to involve bargaining between the two parties. Therefore, in order to achieve optimal pollution the government should issue property rights; this would in resolving disputes over pollution. Also the use of resources identically and efficiently can be enhanced (Pirayoff 134). As long as the firm is producing it is bound to pollute the environment, therefore, we can only consider the cost and benefits of such externalities as suggested by coarse theorem, Such that the level that the firm produces is where the MSC=MSB as illustrated in the diagram below. Price MSC Ps MSB Qs Quantity References Fireside, Daniel, Chris Sturr, and Smriti Rao. Real world micro. 14th ed. Boston, MA: Dollars and Sense, 2007. Print. Gerdes, Louise I.. Pollution. Detroit [Mich.: Greenhaven Press, 2011. Print. Gifford, Clive. Pollution. Chicago, Ill.: Heinemann Library, 2006. Print. Haley, James. Pollution. San Diego: Greenhaven Press, 2003. Print. Hubbard, R. Glenn, and Anthony Patrick Brien. Economics. 2nd ed. Upper Saddle River, N.J.: Pearson Prentice Hall, 2008. Print. Krugman, Paul R., and Robin Wells. Economics. New York: Worth Publishers, 2006. Print. Miller, Roger LeRoy. Economics today: the macro view. 3rd Canadian ed. Toronto: Pearson Addison Wesley, 2005. Print. Siebrand, Jan Cornelis. Towards operational disequilibrium macro economics. The Hague: M. Nijhoff, 1979. Print. Stapleford, John E.. Bulls, bears and golden calves: applying Christian ethics in economics. 2nd ed. Downers Grove, Ill.: IVP Academic, 2009. Print. (Stapleford, 67) Read More