For the last time, we consider the market for a type of cooling lubricant used i

Question

For the last time, we 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. Once the firm takes the government's advice, will the economy be better off? Yes, because total social cost fell more than total spending did. Yes, because total social cost is greater than total spending. No, because total social cost fell less than total spending did. No, because total social cost fell more than total spending did.

Explanation / Answer

Here total cost of production before government recommendation is

12000* 16 = 192,000

After recommendation is

10,000*16= 160,000

Total of 32,000 reduction in spending

Then total external cost to society reduction is 2000* 2 = 4,000 dollars

Then you can see social cost fell less than spending did

C is the answer.

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