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East Chicago is a major production center of steel in the United States. In the process of producing steel, the firms in this area emit pollution both into the air and into the water which adversely affect Indiana residents. The EPAhas determined that the external marginal cost of this pollution to Indiana residents is MCexternal= 10Q. The Chicago-area steel mills' marginal (private) cost of producing steel is 20Q. The inverse market demand for steel has been estimated to be P = 180 - 2Q. ("Q" refers to steel output in thousand-tons).

a). Given this information, how many tons of steel do the residents of Indiana prefer Chicago-area steel mills to produce? Illustrate graphically.

b). Assuming this is a perfectly competitive industry, how many tons of steel will these millsproduce in the course of maximizing profits? Illustrate graphically

c). Why do your answers for parts a and b differ? In your answer, be sure to discuss the nature of the "market failure" here (why does it occur), and suggest a way that it may be eliminated.

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9494228

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