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Suppose that the private market for rubber tires is characterized by the following inverse supply and demand functions

Have a-d completed. Would appreciate experience Q&A for e-g.

1. Suppose that the private market for rubber tires is characterized by the following inverse supply and demand functions: D P 100 - 0.001Q S: P 100.001Q a. Setting supply equal to demand and creating two equations with two unknowns (P and Q), solve for the market clearing price and quantity (P* and Q*) and plot this market on the following graph. Also, calculate the Total Expenditure on rubber tires by society.

Rubber Tires $100 100 S0 Quantity in 1,000s Scenario: Rubber tires are an environmentally intensive good for many reasons. First, the cultivation of rubber plants and the harvesting of usable rubber has large resource (land, water, and labor) requirements. Second, the production of rubber into tires pollutes the air, nearby water (surface and/or ground), and surrounding ecosystems. And finally, the global demand for rubber tires (and rubber in general) is immense and growing Suppose that the EPA calculates that the Marginal External Cost (Damage) from rubber tire production is characterized by: MEC = $20.

This means that every additional tire that is produced creates $20 worth of damage outside of the market. c. In the graph above, plot the Social Supply function which considers the external cost of rubber tire production. Calculate the Dead Weight Loss and Total Damage caused by the externality.1 d. Locate the Socially Efficient Price and Quantity (Peff and Qeff). Calculate the Total Damage caused by the externality at the Social Equilibrium.

1 For Total Damage, iust consider that each tire produces damage egual to MEC. Price e. Now suppose that the EPA revises their MEC estimate to: MEC = 0.001Q. Find the socially efficient equilibrium. Plot this in the graph below. Rubber Tires $100 100 $0 Quantity in 1,000s f. Calculate and compare the Total Damage at both the Private Equilibrium and the Social Equilibrium g. Briefly comment on the two damage functions you used to analyze this economic scenario. Which one do you think is more realistic? Why? Price

Mar 13 2020 View more View Less

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