Mr. Weiss

1. Mr. Weiss Section 14 – Module 75 Activity – Negative Externalties A company has decided to locate its new textbook manufacturing plant on the local river. Effluent from the production process is release into the river. When questioned about this practice, the company responded that it is cheaper to release waste into the river than to have it hauled away. In the weeks that followed, much discussion took place and eventually the local authorities decided to impose a $25 per unit tax on this company. The following graph shows the private cost and private benefits of the plant.

2. Mr. Weiss Section 14 – Module 75 Activity – Negative Externalties • Identify the equilibrium price and quantity for textbooks from the plant. • 2. Calculate the new supply (with the imposition of the tax) and plot it on the graph. • 3. Identify the new quantity demanded.

3. Mr. Weiss Section 14 – Module 75 Activity – Negative Externalties Answers for Questions 1, 2 & 3: S2 Quantity moves from Q1 to Q2 and Price moves from P1 to P2. S1 P2 P1 Q2 Q1

4. Mr. Weiss Section 14 – Module 75 Activity – Negative Externalties Questions 4, 5, 6 & 7: 4. If it is true that the original supply curve depicts the private cost of producing textbooks given the ability to release effluent into the river, and that the new supply curve (including the tax) depicts the social cost of producing textbooks, what cost do people not associated with the production of consumption of textbooks pay per textbook produced? 5. What is the resource allocation problem associated with the presence of significant negative externalities? 6. Explain one market-based solution that would correct for this misallocation or resources. 7. What are some other examples of activities that create negative externalities? How would you suggest that we correct for the resulting market failure?

5. Mr. Weiss Section 14 – Module 75 Activity – Negative Externalties Answers for Questions 4, 5, 6 & 7: 4. Those who are neither consumers nor producers of textbooks are forced to pay some of the costs associated with the production of these goods. In this case, those costs come in the form of a degraded environment and amount to $25 per textbook. 5. Goods for which there are significant negative externalities are overproduced by the market. 6. The tax is one solution that brings the producer to internalize the cost of being paid by society. Some people argue that the privatization of the river would be another solution, although that might be hard to accomplish. 7. Answers may include smoking, driving, playing loud music, manufacturing and littering.