The above figure shows the market for fertilizer. When fertilizer ...

[james0929]

The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs off into neighboring streams and ponds, killing fish and creating an external cost.
 
  a) What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market?
  b) What is the efficient quantity of fertilizer?
  c) Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price paid by consumers and the equilibrium quantity after implementation of the tax?
  d) At the output level in part (c), how much is the tax?
  e) How much tax revenue does government collect?
  f) What is the deadweight loss borne by society if the externality is left uncorrected?

Question 2

Assume that the government of the state of New Jersey has determined that a large number of injuries and deaths have occurred as a result of accidents involving the installation and repairs of electrical equipment at private residences.
 
  In reaction to this problem the state assembly decided to pass a law which made a requirement that all certified electricians take and pass a tougher state licensing examination. Analyze the impact that this law is likely to have on the market for electricians and explain why safety may not necessarily improve.

[carojassy25]

Answer to Question 1

a) The equilibrium price is 1,000 a ton and the equilibrium quantity is 6 tons per day.
b) The efficient quantity is 4 tons per day.
c) The price paid by consumers after the tax is 1,200 a ton and the equilibrium quantity is the efficient quantity, 4 tons per day.
d) The tax is 400 a ton.
e) The government collects 1,600 a day in taxes.
f) The deadweight loss with no government action is 600 a day.

Answer to Question 2

If the state licensing examination becomes more difficult it is likely that there will be fewer authorized and certified electricians in the state of New Jersey. As a result this reduction in supply will lead to higher wages for those who do qualify. The result however may lead more homeowners to perform electrical work themselves which might wipe out or more than wipe out the positive impact of having more highly qualified electricians performing work at private residences.