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Chapter 5: Q 17 (page 122)

Suppose the panel (a) of the figure applies to Pennsylvania's steel market. Suppose that steel manufacturer in this state adopts a new technique for producing steel that entails a smaller external cost. In the absence of any government action to correct the negative externality from steel production, would the overallocation of resources to steel production in Pennslyvania be larger or smaller following the adoption of the next steel-manufacturing technique?

Short Answer

Expert verified

The overallocation of resources to steel production would be larger in the adoption of the next steel-manufacturing technique.

Step by step solution

01

Step 1. Given Information

The graph for the steel market is,

02

Step 2. The overallocation of resources.

The overallocation of resources to steel production would be larger in the adoption of the next steel-manufacturing technique. The overallocation would increase as the new technique will attract a larger number of producers.

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