Question

Now draw a diagram of the market for oranges. Explain how the government policy you discussed in part (b) of Problem 5-2 is likely to affect the market price and equilibrium quantity in the orange market. In what sense do consumers of oranges now “pay” for dealing with the spillover costs of pesticide production?

Short answer

The diagram for the new government policy.

The new government policy will shift the supply curve leftwards with an increase in price and a decrease in quantity.

Consumers pay higher prices for dealing with the spillover costs of pesticide production.

Step-by-step solution

Step 1. Define Externality.

An externality is a consequence of an economic activity that affects the third party. For example, pollution is an externality.

Step 2. The diagram.

The new government policy will shift the supply curve leftwards leading to a rise in the prices of oranges and a fall in the number of oranges as the orange producers have to pay taxes on the contamination of groundwater.

Consumers pay higher prices for dealing with the spillover costs of pesticide production.