TAILIEUCHUNG - Microeconomics for MBAs 25

Microeconomics for MBAs 25. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 7 Market Failures External Costs And Benefits 10 of meeting the limit of two units is shown in the lower half of Table . Firm A incurs the relatively modest cost of 700 100 200 400 . But firm B must pay 2 600 200 600 1 800 . The total cost to all firms is 13 500. What if the EPA adopts a different strategy and sells rights to pollute Such rights can be thought of as tickets that authorize firms to dump a unit of waste into the atmosphere. The more tickets a firm purchases the more waste it can dump and the more cleanup costs it can avoid. TABLE Costs of Reducing Sulfur Dioxide Emissions A B C D E Marginal cost of eliminating each unit of pollution First unit 100 200 200 600 1 000 Second unit 200 600 400 1 000 2 000 Third unit 400 1 800 600 1 400 3 000 Fourth unit 800 5 400 800 1 800 4 000 Fifth unit 1 600 16 200 1 000 2 200 5 000 Cost of Reducing Pollution by Establishment of Government Standards Cost of Reducing Pollution by Sale of Pollution Rights Cost to A of eliminating 3 units 700 Cost to A of eliminating 4 units 1 500 Cost to B of eliminating 3 units 2 600 Cost to B of eliminating 2 units 800 Cost to C of eliminating 3 units 1 200 Cost to C of eliminating 5 units 3 000 Cost to D of eliminating 3 units 3 000 Cost to D of eliminating 3 units 3 000 Cost to E of eliminating 3 units 6 000 Cost to E of eliminating 1 unit 1 000 Total cost of five units 13 500 Total cost of five units 9 300 Remember that the EPA can control the number of tickets it sells. To limit pollution to the maximum acceptable level of ten units all it needs to do is sell no more than ten tickets. Either way whether by pollution standards or rights the level of pollution is kept down to ten units but the pollution rights method allows firms that want to avoid the cost of a cleanup to bid for tickets. The potential market for such rights can be illustrated by conventional supply and demand curves as in Figure . The supply curve is determined by EPA policymakers who limit the .

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