Question

Table 12.5 provides the supply and demand conditions for a manufacturing firm. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the firm is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included. $$\begin{array}{l|l|ll}\hline \text { Price } & \begin{array}{l}\text { Quantity } \\\\\text { Demanded }\end{array} &\begin{array}{l}\text { Quantity Supplied without paying } \\\\\text { the cost of the pollution }\end{array} &\begin{array}{c}\text { Quantity Supplied after paying } \\\\\text { the cost of the pollution }\end{array} \\\\\hline \$ 10 &450 & 400 & 250 \\\\\hline \$ 15 & 440 & 440 & 290 \\\\\hline \$ 20 & 430 & 480 & 330 \\\\\hline \$ 25 & 420 & 520 &370 \\\\\hline \$ 30 & 410 & 560 & 410 \\\\\hline\end{array}$$

Short answer

The equilibrium point without accounting for the social cost of pollution is at a price of \$15, with a quantity demanded and supplied of 440 units. When accounting for the social cost of pollution, the equilibrium point is at a price of \$30, with a quantity demanded and supplied of 410 units.

Step-by-step solution

An equilibrium point in this context means the price at which the quantity demanded equals the quantity supplied. We will find the equilibrium points for both cases - without considering the pollution cost and with the pollution cost. #Step 2: Finding Equilibrium Without Pollution Cost#

To find the equilibrium point without considering the pollution cost, we will compare the quantity demanded and quantity supplied (not considering pollution costs) columns in the table. We need to identify a price where the values in these columns are equal. Price: Quantity Demanded vs. Quantity Supplied (without pollution) - \$10: 450 vs. 400 - \$15: 440 vs. 440 - \$20: 430 vs. 480 - \$25: 420 vs. 520 - \$30: 410 vs. 560 We can observe that at the price of \$15, the quantity demanded (440) is equal to the quantity supplied without considering pollution costs (440). So, the equilibrium point without considering pollution cost is at a price of \$15. #Step 3: Finding Equilibrium With Pollution Cost#

To find the equilibrium point while accounting for the pollution cost, we will compare the quantity demanded and quantity supplied (after accounting for pollution costs) columns in the table. We need to identify a price where the values in these columns are equal. Price: Quantity Demanded vs. Quantity Supplied (with pollution) - \$10: 450 vs. 250 - \$15: 440 vs. 290 - \$20: 430 vs. 330 - \$25: 420 vs. 370 - \$30: 410 vs. 410 We can observe that at the price of \$30, the quantity demanded (410) is equal to the quantity supplied after considering pollution costs (410). So, the equilibrium point while accounting for the pollution cost is at a price of \$30. #Step 4: Presenting the Results#

We found that the equilibrium point without accounting for the social cost of pollution is at a price of \$15, where the quantity demanded and supplied are equal to 440. On the other hand, when accounting for the social cost of pollution, the equilibrium point is at a price of \$30, where the quantity demanded and supplied match at 410 units.

Key concepts

Supply and Demand

Understanding the dynamics of supply and demand is crucial for grasping market equilibrium. In any given market, supply refers to the total amount of a good or service available for purchase, while demand represents how much consumers are willing and able to buy at various prices.

When visualizing these concepts, we often use a graph with price on the vertical axis and quantity on the horizontal axis. The supply curve generally slopes upwards, indicating that a higher price leads to a higher quantity supplied. Conversely, the demand curve usually slopes downwards, reflecting that a higher price typically reduces the quantity demanded.

Why Is This Important?

By analyzing supply and demand graphs, we can determine the point at which the market is considered to be in balance – this is known as the market equilibrium. At this point, the amount of goods being supplied is exactly equal to the amount being demanded, meaning there is neither a surplus nor a shortage. Market forces drive adjustments in price and output to reach this state, reflecting the collective economic activities of buyers and sellers.

Social Cost of Pollution

The social cost of pollution is a term that encapsulates the economic impact of pollution on society as a whole, including health effects, damage to the environment, and reduced agricultural yields, to name a few. Standard supply curves typically do not take these costs into account, as they represent the private cost to producers alone.

When firms are required to pay for the pollution they create, it effectively increases their costs of production. This is reflected in the supply curve shifting to the left, indicating a decrease in the quantity supplied at any given price. The inclusion of these external costs leads to a new equilibrium, where the socially responsible price is higher than it would be otherwise.

The Environmental and Economic Balance

Integrating the social cost of pollution into market prices can help to better align private incentives with public well-being. While the resultant higher prices and lower output may not be favorable from the firm's profit-maximizing perspective, they tend to lead to more sustainable and socially beneficiary outcomes. This practice can encourage businesses to innovate and adopt cleaner technologies to reduce their environmental impact.

Equilibrium Price

The equilibrium price, also known as the market-clearing price, is the price at which the quantity of a good or service that producers are willing to supply is equal to the quantity that consumers are willing to buy.

In our exercise, the equilibrium was initially found at a lower price when the social cost of pollution was not considered. However, after accounting for these costs, the equilibrium price rose, indicating that consumers would need to pay more for the product to cover the additional expenses the firm incurs to mitigate pollution.

Importance in Markets

Knowing the equilibrium price is crucial for both buyers and suppliers, as it helps them make informed decisions. For policy-makers, understanding how taxes or subsidies can affect the equilibrium price is vital for creating regulations that can lead to socially optimal outcomes, such as reducing pollution. Addressing the social cost of pollution changes the market's dynamics, ensuring that prices reflect the true cost of goods, including their environmental impact.