Question

The market price of insecticide is initially $\backslash (10$per unit. To address a negative externality in this market, the government decides to charge producers of insecticide for the privilege of polluting during the production process. A fee that fully takes into account the social costs of pollution is determined, and once it is put into effect, the market supply curve for insecticide shifts upward by $\backslash )4$per unit. The market price of insecticide also increases, to$\$12$ per unit. What fee is the government charging insecticide manufacturers?

Short answer

The government calculates its price for producing pesticides by taking into account the societal cost.

Step-by-step solution

Given data

The market price of insecticide is initially $\$10$per unit.

The market supply curve for insecticide shifts upward by$\$4$per unit.

The market price of insecticide also increases, to $\$12$per unit.

To Find

The fee of government charges the insecticide manufacturers.

Determine the fee of government charge using social cost

The government will charge$\$4$per unit, taking into account the additional social security charges. The shift of the market supply curve to the right for $\$4$per unit indicates that the government is demanding $\$4$ per unit. The government charges this fee in consideration of social costs.

Determine the charging manufracturer of insecticide by government

If the government charges $\$4$per unit, the supply of the pesticide market will shift up accordingly. Social costs are determined by taking into account external and private costs. The government sets the manufacturing fee for pesticides in consideration of social costs.