Page 734 - Microeconomics, Fourth Edition

c17ExternalitiesandPublicGoods.qxd 8/22/10 4:56 AM Page 708

708 CHAPTER 17 EXTERNALITIES AND PUBLIC GOODS

$24 A MSC = MPC + MEC

22 L
MPC + T, = Supply with emissions fee
(when T = 6)
MPC = Supply
M
16 B
MEC
Price (dollars per ton) 10 9 J E N H
13

6 W I D = Demand (marginal benefit)
K
X
4 V

2
F
G R U
0 2 8 11 24
Quantity (millions of tons of chemical per year; Millions of units of pollution per year)

No Emissions Emissions Fee
Fee of $6 per Unit
Consumer surplus AJH ABM
$60.5 million $32 million

Private producer surplus FJH FEN
$60.5 million $32 million

Cost of externality VLH ( GIU) VNM ( GKR)
$40.5 million $18 million
Government receipts from emissions fee zero ENMB
$48 million
Net social benefits (consumer surplus AMVF MLH AMVF
private producer surplus cost of externality $80.5 million $94 million
government receipts)

FIGURE 17.4 Emissions Fee
The economically efficient output is 8 million tons, determined by the intersection of the
demand and MSC curves at point M. An emissions fee of $6 per unit of pollutant leads to the
efficient level of output. With no emissions fee, the price of the chemical is $13 per ton, and
11 million tons are sold each year. The negative externality leads to an inefficiently high level
of pollution and a deadweight loss of $13.5 million per year.