Answer Happy

Costs ($) 6. The graph below shows the marginal private cost of a robot producing factory for phone construction. The robots use a toxic chemical that emits emissions. This affects the citizens of Port Elizabeth who have mobile phone factories in their town. The marginal social cost that the town citizens' face is also captured by the diagram. The firm faces a price of $340 per phone. 600 MSC 460 500 400 MPC 300 p=340 260 200 100 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Output, Q a) Why is the marginal social cost equal zero at an output quantity of zero? (2 marks). b) Why does the marginal private cost curve slope upward? (2 marks). c) Why does the marginal social cost curve slope upward at a different rate than the marginal private cost curve? (2 marks). d) Write down the MSC curve equation. (2 marks). e) Write down the MPC curve equation. (2 marks).
8. Now assume that the factory has the right to produce using the robots and the town citizen's do not have the property rights for clean air. There are three policies that can be implemented to reach an efficient outcome. Regulation, Tax and Enforced Compensation. Consider them in turn and answer the following questions with the diagram from above. The firm faces a price of $340 per phone. Regulation a) Where would the government cap production to if it were to regulate the market to reach an efficient outcome? (2 marks). b) What would the factory's loss of profit be (show all calculations). (3 marks). c) What do the town citizens' gain? (2 marks). Taxation d) What is the amount of the Pigouvian tax used to reach a pareto optimal outcome? (2 marks). e) What is the after tax price received by the factory? (2 marks). Enforcing compensation f) Explain how compensation will be paid to the towns' citizens as a collective for their pollution. (3 marks). g) Calculate how much this compensation will be. Show all workings. (3 marks). 9. Discuss the limits to taxation, regulation, enforced compensation and bargaining in your own words. (8 marks).