The pharmaceutical company Merck Inc. pays the government of Costa Rica (through the national Institute InBIO) money to conserve natural rain forest and to obtain exclusive plant specimens from this forest for their research. Suppose Merck bases the decision about what area x of forest to protect on the aim of maximizing profits. The marginal private benefit MB, the marginal external benefits MEB and the marginal costs MC of forest area r are given by: MB(x) = 10 – r MEB(r) 5 – 2 MC(x) (a) Represent the situation in a diagram and explain in economic terms why the exter- nality associated with forest conservation leads to market failure, i.e. to a market

The pharmaceutical company Merck Inc. pays the government of Costa Rica (through the national Institute InBIO) money to conserve natural rain forest and to obtain exclusive plant specimens from this forest for their research. Suppose Merck bases the decision about what area x of forest to protect on the aim of maximizing profits. The marginal private benefit MB, the marginal external benefits MEB and the marginal costs MC of forest area r are given by: MB(x) = 10 – r MEB(r) 5 – 2 MC(x) (a) Represent the situation in a diagram and explain in economic terms why the exter- nality associated with forest conservation leads to market failure, i.e. to a market

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...

See similar textbooks

Similar questions

Identify the following situations as an example of a negative or a positive externality: You are a birder (bird watcher), and your neighbor has put up several birdhouses in the yard as well as planting trees and flowers that attract birds. Your neighbor paints his house a hideous color. Investments in private education raise your countrys standard of living. Trash dumped upstream flows downstream right past your home. Your roommate is a smoker, but you are a nonsmoker.
Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and output. a. Assuming that the production of televisions generates external costs, illustrate the effect of the producers being forced to pay a tax equal to the external costs generated, and indicate the equilibrium output. b. If instead of generating external costs, television production generates external benefits, illustrate the effect of the producers being given a subsidy equal to the external benefits generated, and indicate the equilibrium output.
Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?
Refer to Table 12.2. The externality created by the refrigerator production was 100. However, once we accounted for both the private and additional external costs, the market price increased by only 50. If the external costs were 100 why did the price only increase by 50 when we accounted for all costs?
Do market demand curves reflect positive externalities? Why or why not?