Week 4


  1. An equiproportionate decrease in emission by 50% to 15 tons a week would lead to each firm reducing their emission to 5 tons per week. Therefore, this would cost the three firms $96. The firms cost would be in reference to the 5 ton per week emission cost which would cost the three firms the following: Firm 1, the cost would be the sum of $0 + 8+12+16+20= $60. Firm 2 would incur, $0+1+2+4+6+8 = $ 21 while firm 3 would incur $0+1+2+3+4+5= $15. The total cost would be $ 60+21+15 = $96.

  2. In order to meet satisfy the equimarginal rule and meet the 15 tons emission per week, therefore firm 1 would reduce to 8 tons, firm 2,5 tons and firm 3, 2 tons. The aggregate cost would be: firm 1, $12, (8+4). Firm 2 would incur $21, which is (1+2+4+6+8). Firm 3 would incur $36 (1+2+3+4+5+6+7+8). Therefore the total cost would be $12+$21+36=$69.

  3. In order for the firms to reduce the emissions to 9 tons a week, each firm would have to reduce its emissions to 3 tons a week. This will cost firm 1, $112 ($0+4+8+12+16+20+24+28). Firm 2 would incur $53 ($0+1+2+4+6+8+12+20) while firm 3 would incur $28 ($0+1+2+3+4+5+6+7). Therefore, the total cost would be the sum of $112 + $52 + $28 = $193.

  4. In order to meet the equimarginal principle at 9 tons per week emissions, the following cost would be incurred. Firm 1 would be required to reduce emission to 4 tons, firm 2 would reduce emissions to 5 tons per week while firm 3 would have no emissions at 0. Therefore, the total cost would be $ 60+ $33+ $55= $148.


b)The equilibrium price and equilibrium quantity would be: $10 and 10units. The MWTP would be equal to the MPC. Therefore





Sinceq =p, the price would also be $10.

Thetotal surplus would be at $60, which is $64- $4= $60.

c)The efficient price and quantity would be at $12 and 8 unitsrespectively. This is because the MWTP would be equal to the MSC.Therefore




price= 20-8


Thetotal surplus would be equal to $64, 8*16/2 = $64

d) A tax of $4 would push the quantity of units consumed to 8.Therefore, it would raise a total of $32 (8*4). The suppliers wouldenjoy a surplus of $32 (8*8/2) and consumers would also enjoy thesame surplus of $32. (8*8/2). At this point the total revenue wouldequal external cost.


a)$ 0 would be invested by each household. This is because for everydollar invested, the household would enjoy $0.50.

b)The efficient level of investment would be at $400. This is becauseeach household which has invested $ 100 for the park would get back $200 return in the form of enjoyment.

c)The four households would achieve efficient levels of investment bycooperating and putting $100 that will go towards the park. Onlypeople who have contributed to the park can enjoy its facilities.


1.In order to protect the quality of water resources near a wetlandsome restriction has been placed to prevent housing developmentwithin 100 feet from the wetland. This restriction might have socialcosts to the residents in that the value of housing beyond thewetland could increase. This can be estimated by the distance aparcel of land is in relation to the wetland. The closer a parcel ofland is to the wetland, the more expensive the parcel of land willbe. In addition, most people would prefer developing their houses faraway from the wetland and therefore, environmental costs in regardsto the development of housing will be reduced.

2.The proposed tax on gasoline is aimed at raising money in order tocurb the effects of pollution caused by motorists. Based on lastyear’s numbers, motorists consumed 10.3 million gallons ofgasoline. However, with the tax levy the total number of gasolineconsumed by motorists will definitely be lower as most people willonly be willing to spend so much. The tax levied on gasoline willrise the gasoline prices and therefore less gasoline will consumed inthe current year. Hence, the agencies should expect to collectsignificantly less revenue as gasoline consumption will be less thanthe anticipated 10.3 million gallons.


b)In an unregulated market, the equilibrium price would be at $2. Thisis because the marginal private cost stands at $2. However, theequilibrium quantity would be at 14 units. The total surplus will be$140 which will be the area of the two triangles.

c)In order to have efficient price and quantity, the MWTP will be equalto the MSC.




q=12 units

Theprice on the other hand will be $6.

Thisis because, 30 -2(12) = $6

Thetotal surplus will be the area of one triangle, which will be equalto $144. (0.5*24*12)

d) A $4 tax on water would make the neighborhood consume efficientquantity of water. This is because, at tax of $4, would equal theMarginal External Cost (MEC) of $48. The consumers as usual wouldbear the cost of the tax as producers will push the tax to the finalusers.

  1. If the demand function changed to 16-x, the price for the water would be at the MPC, which is equal to $2 and the quantity would be 14 units as mentioned earlier. However, the total surplus would have reduced to $92. Since an efficient price requires $6 and a quantity of 10 units, the total surplus would be $100. Therefore, the tax should raise $40 in order to make up for the lost $40 ($140-$100).