ECON101 Module 3 Market Efficiency and Market Failures Discussion Paper

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Discussion on Market Efficiency and Market Failures

This discussion assignment gives you a basic idea how economists think about pollution and environmental issues. Read the following short article:

Economics and the Environment (Links to an external site.)Links to an external site.

Answer the questions:

  1. What kinds of different tools/policies government uses to control negative externalities from pollution, and which ones of those policies economists prefer and why? (max. 1 point)
  2. Now assume the scenario presented in the article: A firm is producing widgets, and it is shifting $10 of its production costs per widget to society in the form of pollution. The government (representing society) imposes a $10 tax per widget on the firm. Use the supply-demand framework to show:
    1. the demand and supply curves before and after tax (private supply curve vs. social supply curve). Also show the new equilibrium price paid by consumers, price received by the firm, and the new equilibrium quantity of widgets. Explain your answer. (max. 1.5 points)
    2. consumer and producer surpluses after the tax, tax revenue, and deadweight loss occurring because of the tax. (max. 1 point)
    3. What happens to consumer and producer surpluses after the tax has been imposed? (max. 0.5 point)
  3. Reply to someone else’s post. (max. 1 point)

Create your diagram using DrawIO or another drawing tool (hand-drawn diagram is fine as long as it is neat) – just make sure your diagram is embedded/attached in your reply.

Here are instructions how to embed you DrawIO diagram into Canvas: DrawIO info for Canvas (Links to an external site.)Links to an external site. and Additional DrawIO info (Links to an external site.)Links to an external site.

 
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