question 17 · 1 point\nthe table below shows the supply and demand for the output of a firm which creates…

question 17 · 1 point\nthe table below shows the supply and demand for the output of a firm which creates pollution. the third column shows the supply schedule for the firm without paying the costs of pollution. the last column represents the supply curve when the firm also pays the social costs of pollution.\nwhich of the below statements is true?\nsupply and demand for a firm which generates pollution\nselect the correct answer below:\nwhen the firm pays the costs of pollution, it produces less and charges a higher price in equilibrium.\nwhen the firm pays only the private costs of production, it produces too little output.\nwhen the firm only pays the private costs of production, the equilibrium price is $19.\nwhen the firm also pays the social costs of production, the equilibrium price is $16

question 17 · 1 point\nthe table below shows the supply and demand for the output of a firm which creates pollution. the third column shows the supply schedule for the firm without paying the costs of pollution. the last column represents the supply curve when the firm also pays the social costs of pollution.\nwhich of the below statements is true?\nsupply and demand for a firm which generates pollution\nselect the correct answer below:\nwhen the firm pays the costs of pollution, it produces less and charges a higher price in equilibrium.\nwhen the firm pays only the private costs of production, it produces too little output.\nwhen the firm only pays the private costs of production, the equilibrium price is $19.\nwhen the firm also pays the social costs of production, the equilibrium price is $16

Answer

Brief Explanations:

  • Option 1:
    • When a firm pays the social costs (including pollution costs), its supply curve shifts left (as seen in the table, quantity supplied at each price is lower). In equilibrium (where quantity demanded = quantity supplied), with lower supply, the quantity produced is less. And since supply is lower, the price (to reach equilibrium) is higher. For example, without paying pollution costs, at price ($16), quantity demanded ( = 4) and quantity supplied (without paying) (=4) (equilibrium). When paying, at a higher price range (compared to non - paying equilibrium), the quantity supplied (after paying) will be such that it equals quantity demanded.
  • Option 2:
    • When a firm pays only private costs (without paying pollution costs), in a market with negative externality (pollution), it over - produces. Because it does not account for the external cost (pollution). For example, at price ($16) (without paying pollution costs), quantity supplied (without paying) ( = 4) and quantity demanded (=4). But if we consider social costs (paying for pollution), the “right” (socially optimal) quantity would be lower. So the firm does not produce too little when only paying private costs.
  • Option 3:
    • When the firm only pays private costs, equilibrium occurs where quantity demanded = quantity supplied (without paying pollution costs). At price ($16), quantity demanded (=4) and quantity supplied (without paying) ( = 4). So the equilibrium price is ($16) (not ($19)) when only private costs are considered.
  • Option 4:
    • When the firm pays social costs, we need to find where quantity demanded = quantity supplied (after paying). Looking at the table, when the firm pays social costs, there is no row where quantity demanded equals quantity supplied (after paying) at ($16). For example, at ($16), quantity demanded (=4) and quantity supplied (after paying) (=2).

Answer:

When the firm pays the costs of pollution, it produces less and charges a higher price in equilibrium.