Again, please consider the market for a type of cooling lubricant used in manufa

Question

Again, please consider the market for a type of cooling lubricant used in manufacturing small electronic components. It makes production much cheaper, but it also causes pollution of various types. The lubricant is produced by a small, perfectly competitive, price-taking firm. It charges a price of $16 per unit and, based only on private costs, produces 12,000 units. Due to the externality that occurs when pollution is created by this production process, a government agency intervenes, saying that when a quantity of 12,000 units is produced the firm is creating a marginal social cost per unit of $2. The government recommends that only 10,000 units be produced. Assume throughout that all "curves" are really straight lines. This information will be repeated in future questions for your convenience. Calculate the reduction in total spending that will occur as the firm goes from producing 12,000 units to taking the government's advice and producing 10,000. Again, enter a positive number despite the fact that this is a reduction in spending. Carefully follow all numeric instructions.

Explanation / Answer

12,000 units were produced at the cost of $16 each so total output was 192,000

Then 10,000 units are now produced at cost of $16 then output is 160,000

So total reduction in spending is 192,000-160,000 = 32,000

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