Assume a market for fertilizers, and let D denote the demand of fertilizers while S their supply. The inverse demand is p = 10 - q, and the supply is MC = q. The marginal damage created by runoff water being exposed to fertilizers is MEC = q/2The use of fertilizers is creating an externality and the government wishes to intervene in the market.Use a figure to depict the competitive outcome. Derive the competitive equilibrium outcome.Use a second figure to explain the negative externality attributed to the use of fertilizers. The use of fertilizers improves yield, but it also damages the underground aquifer.What is the Pigovian Tax? Use a figure to explain. Can it be used to correct for the externality? Derive the Pigovian tax and characterize the social optimum solution.Can a standard achieve the social optimum? What about a quota? Explain using a figure.Explain and show step-by-step for last two questions please!

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Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter11: Public Goods And Common Resources

Section: Chapter Questions

Problem 2PA

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Assume a market for fertilizers, and let D denote the demand of fertilizers while S their supply. The inverse demand is p = 10 - q, and the supply is MC = q. The marginal damage created by runoff water being exposed to fertilizers is MEC = q/2

The use of fertilizers is creating an externality and the government wishes to intervene in the market.

Use a figure to depict the competitive outcome. Derive the competitive equilibrium outcome.
Use a second figure to explain the negative externality attributed to the use of fertilizers. The use of fertilizers improves yield, but it also damages the underground aquifer.
What is the Pigovian Tax? Use a figure to explain. Can it be used to correct for the externality? Derive the Pigovian tax and characterize the social optimum solution.
Can a standard achieve the social optimum? What about a quota? Explain using a figure.

Explain and show step-by-step for last two questions please!

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A negative externality is a cost or negative impact imposed on a third by the production or consumption of a good or service by an economic agent. This cost is not reflected in the market price nor is accounted for by the producer or consumer.

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