Chapter 74, Problem 1FRQ

To determine

The reason why the quantity of pollution will be chosen in the absence of intervention and private deals along with the correctly labeled graph, which shows the market-determined quantity of pollution and socially optimal level of pollution.

Explanation of Solution

The correct labeled graph that shows the market-determined quantity of pollution and socially optimal level of pollution:

The vertical axis of the graph represents the marginal social cost and marginal social benefit of pollution and the horizontal axis of the graph represents the quantity of pollution. Here, the marginal social benefit-cost curve is downward sloping and the marginal social cost curve is upward sloping. The level of pollution which is determined by the market is shown at the point of QMKT where the MSB curve reaches the horizontal axis.

And, at the point of QQPT where the MSB curve and MSC curve intersects is the point that shows the optimal level of pollution.

The quantity of pollution will be chosen in the absence of intervention and private deals because the marginal cost of pollution is zero for the polluter. This means pollution will continue until it reaches the marginal social benefit of the polluter, which would equal the zero marginal cost of the polluter.

And, it occurs where the marginal social cost curve intercepts the horizontal axis of the graph.

Economics Concept Introduction

Introduction: Externality problems such as pollution refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market. The quantity where all the costs and benefits are accounted for is called socially optimal quantity.