Graphical Analysis, continued MB marginal benefit to steel firm MPC marginal private cost to steel firm MD marginal damage to fishery MSC= MPC+MD marginal social cost
6 Graphical Analysis, continued • MB = marginal benefit to steel firm • MPC = marginal private cost to steel firm • MD = marginal damage to fishery • MSC = MPC+MD = marginal social cost
Figure 5.1 MSC= MPC MI (marginal social cost MPC (marginal private cost) (marginal damage MB(marginal benefit) e per year Socially Actual efficient output
Figure 5.1
Graphical Analysis, continued From figure 5.1, as usual, the steel firm maximizes profits at MB=MPC. This quantity is denoted as Q, in the figure Social welfare is maximized at B=Msc Which is denoted as Q in the figure
8 Graphical Analysis, continued • From figure 5.1, as usual, the steel firm maximizes profits at MB=MPC. This quantity is denoted as Q1 in the figure. • Social welfare is maximized at MB=MSC, which is denoted as Q* in the figure
Graphical Analysis, Implications Result 1: Q1>Q Steel firm privately produces" too much"steel, because it does not account for the damages to the fishery Result 2: Fishery's preferred amount is 0 Fishery's damages are minimized at MD=0 Result 3: Q is not the preferred quantity for either party, but is the best compromise between fishery and steel firm Result 4: Socially efficient level entails some pollution Zero pollution is not socially desirable
9 Graphical Analysis, Implications • Result 1: Q1>Q* – Steel firm privately produces “too much” steel, because it does not account for the damages to the fishery. • Result 2: Fishery’s preferred amount is 0. – Fishery’s damages are minimized at MD=0. • Result 3: Q* is not the preferred quantity for either party, but is the best compromise between fishery and steel firm. • Result 4: Socially efficient level entails some pollution. – Zero pollution is not socially desirable
Figure 5.2 MSC= MPC + MD Lisa MPC Bart loses area cang area dcg MD MB Q per yes
Figure 5.2