Question

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plastics, the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward?
A) Optimal price and quantity decrease.
B) Optimal price increases, optimal quantity remains unchanged.
C) Optimal price increases, optimal quantity decreases.
D) Optimal price and quantity decline.

Answer 1

Answer:

The answer is option C) What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward is Optimal price increase and optimal quantity decrease.

Explanation:

when marginal external cost curve shifts upward, it indicates diminishing marginal returns.

A diminishing marginal return occurs when increases in one factor of production while the others remain constant results in increasingly reduced productivity.

In this scenario, the decrease in productivity levels is a response to the marginal external cost of the pollutants increasing with the quantity of plastics thereby causing optimal price increase and optimal quantity decrease.