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 the cost of producing insecticides by taking into account the social cost.

Step-by-step solution

Given Information

• Initial market price of insecticide is $\$10$per unit.
• It shifts upward by $\$4$ per unit in the market supply curve for insecticide.
• insecticide's market price is also increases $\$12$ per unit.

Introduction 

• In addition to the societal cost, the government is charging $\$4$per unit.
• A movement of $\$4$per unit to the right on the market supply curve shows that the government is charging $\$4$per unit.
• The government assesses this fee by taking into account the social cost.

Conclusion

• When a government charges $\$4$per unit, the market supply of pesticide swings higher.
• External and private costs are combined to determine social cost.
• The government calculates the cost of producing insecticides by taking into account the societal cost.