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

$\$4$ is the fee charged by the government for insecticide manufacturers.

Step-by-step solution

Calculating the fee charged by the government for insecticide manufacturers.

In addition to the social cost, the government is charging$\$4$per unit. A rightward change in the market supply curve of$\$4$ per unit suggests that the government is charging$\$4$ per unit. The government calculates this fee by taking into account the social cost.

If the government charges $\$4$per unit, the market supply of pesticide increases proportionally. External and private costs are taken into account when determining social cost. The government bases its fee on the social cost of producing pesticides.