Consider a piece of land covered by old-growth forest which could potentially be cleared and converted to agricultural use. The marginal benefit MB, the marginal private costs MC and the marginal external costs MEC of converting an area r of land are: MB(r) 10 – z MC(r) 3 МЕС(г) (a) Represent the situation in a diagram and explain in economic terms why the ex- ternality associated with land conversion leads to market failure, i.e. to a market equilibrium that is not socially optimal. (b) Determine analytically (i) the equilibrium allocation that results from individual utility maximization, (ii) the socially optimal allocation that results from consider- ing the full social costs, and (iii) compare both allocations.

Consider a piece of land covered by old-growth forest which could potentially be cleared and converted to agricultural use. The marginal benefit MB, the marginal private costs MC and the marginal external costs MEC of converting an area r of land are: MB(r) 10 – z MC(r) 3 МЕС(г) (a) Represent the situation in a diagram and explain in economic terms why the ex- ternality associated with land conversion leads to market failure, i.e. to a market equilibrium that is not socially optimal. (b) Determine analytically (i) the equilibrium allocation that results from individual utility maximization, (ii) the socially optimal allocation that results from consider- ing the full social costs, and (iii) compare both allocations.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 2PA

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