Question

A government policy that charges steel firms a fee per ton of steel produced (an "effluent charge") where the fee is determined by the amount of pollutants discharged into the air or water will lead to a. a decrease in the market equilibrium quantity of steel produced. b. a decrease in the market equilibrium price of steel. c. an increase in the market equilibrium price of steel. d. the results in (a) and (b). e. the results in (a) and (c).

Short answer

e. the results in (a) and (c).

Step-by-step solution

1. Identify the effects of the effluent charge on steel production.

An effluent charge is a fee imposed by the government on steel firms for each ton of steel produced, which creates an additional production cost for the firms. Due to this higher production expenditure, steel firms are likely to reduce production levels to minimize the charges and maintain their profitability.

2. Examine the effect on steel supply curve as a result of the effluent charge:

Since the steel sector will be facing higher production costs, this will cause the supply curve to shift to the left. It means that at any given price, producers will now supply less steel due to the additional effluent charges they are incurring per ton of steel produced.

3. Determine the effect on market equilibrium under the new supply conditions:

As the supply curve has shifted to the left, it will intersect the demand curve at a new point. Since the demand curve hasn't changed, it indicates that there will be a new market equilibrium with lower steel production (quantity) and a higher price for steel.

4. Select the correct response by matching the new market equilibrium situation with the given options:

Using the analysis above, we have found that the market equilibrium has shifted to a new point with a decrease in the quantity of steel produced and an increase in the price of steel. Therefore, the correct answer is: e. the results in (a) and (c).

Key concepts

Effluent Charge

The concept of an effluent charge involves the government imposing a fee on firms based on the amount of pollution they emit, a policy with significant economic and environmental implications. This fee is intended to internalize the external costs of pollution, which are costs that affect individuals not directly involved in the economic transaction. By leveraging an effluent charge, the government aims to encourage firms to reduce their pollution levels, as the charge increases their cost of production.

An effluent charge effectively raises the cost of producing goods that contribute to pollution, such as steel in our case. As firms are charged per unit produced, their marginal cost— the cost of producing an additional unit of output—also increases. This results in a direct financial incentive for firms to decrease production, invest in cleaner technologies, or find other means to reduce emissions to avoid these additional costs. The effect of an effluent charge on the market for a good can be analyzed using the supply and demand framework, which brings us to our next core concept.

Supply and Demand

Supply and demand are the forces that drive the market economy, determining the quantity of goods and services produced as well as their prices. In the context of the effluent charge, it's important to understand how this policy affects supply and demand curves for steel production.

The supply curve represents the relationship between the price of a good and the amount producers are willing and able to sell. As the effluent charge raises production costs for steel producers, the supply curve shifts to the left, symbolizing a reduction in the quantity of steel firms are willing to provide at any given price. In essence, as costs rise, the incentive is to produce less.

On the other hand, the demand curve, representing the relationship between the price of a good and the amount consumers are willing to purchase, remains unaffected by the effluent charge directly. However, the demand for steel could indirectly be affected if the higher prices lead to a search for substitutes or a reduction in consumption. Combining these supply and demand curves helps us understand the new market equilibrium after the introduction of an effluent charge.

Government Policy Economics

Government policies, including those like the effluent charge, can have a significant impact on market equilibrium. Such policies are often enacted to correct market failures, such as the negative externalities resulting from pollution. Economic theories suggest that left unchecked, markets can lead to inefficient outcomes—such as excessive pollution—that warrant intervention.

In the case of steel production, the government uses the effluent charge as a corrective tool. This charge alters the behavior of the market players by making them financially accountable for the pollution they generate, aligning private costs with social costs. The consequent shift in the supply curve due to an effluent charge results in a new market equilibrium, often at a lower quantity and a higher price than before.

Nevertheless, while such policies may lead to a decrease in pollution and a more socially desirable outcome, they also result in higher prices for consumers and potential reductions in employment within affected industries. These trade-offs are key considerations in government policy economics, demonstrating the delicate balance policymakers must strike to achieve environmental goals while minimizing negative economic impacts.