Suppose that the Badger Paper Company (BPC) is located along the Pike River in Kenosha County, and suppose that BPC’s production of paper pollutes the Pike River. The marginal private benefit and marginal social benefit curve for paper are represented by the equation [tex]MPB(Q) = MSB(Q) = 60 – 0.75Q[/tex], where [tex]Q[/tex] is the production of BPC’s paper. BPC’s marginal private cost of paper production is given by the equation [tex]MPC(Q) = 20 + 0.25Q[/tex]. The negative externality or marginal external cost associated with BPC’s paper production is represented by the equation [tex]MEC(Q) = 10 + 0.25Q[/tex].

a) Illustrate (plot) the [tex]MPC[/tex], [tex]MEC[/tex], and [tex]MPB = MSB[/tex] curves in the graph on the next page. Derive and illustrate the marginal social cost, [tex]MSC[/tex], curve; i.e., construct the equation for the [tex]MSC[/tex] curve.

Question

13-11-2024
Business

High School

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Suppose that the Badger Paper Company (BPC) is located along the Pike River in Kenosha County, and suppose that BPC’s production of paper pollutes the Pike River. The marginal private benefit and marginal social benefit curve for paper are represented by the equation [tex]MPB(Q) = MSB(Q) = 60 – 0.75Q[/tex], where [tex]Q[/tex] is the production of BPC’s paper. BPC’s marginal private cost of paper production is given by the equation [tex]MPC(Q) = 20 + 0.25Q[/tex]. The negative externality or marginal external cost associated with BPC’s paper production is represented by the equation [tex]MEC(Q) = 10 + 0.25Q[/tex].

a) Illustrate (plot) the [tex]MPC[/tex], [tex]MEC[/tex], and [tex]MPB = MSB[/tex] curves in the graph on the next page. Derive and illustrate the marginal social cost, [tex]MSC[/tex], curve; i.e., construct the equation for the [tex]MSC[/tex] curve.

Answer :

Final answer:

The Marginal Social Cost (MSC) for the Badger Paper Company is calculated by summing the given Marginal Private Cost (MPC) and Marginal External Cost (MEC). This gives us the equation MSC(Q) = 30 + 0.5Q. On a graph, the MSC curve appears above the MPC curve as it encompasses the external costs associated with paper production.

Explanation:

This question is related to the field of economics, specifically looking at the concepts of marginal private benefit, marginal social benefit, marginal private cost, and marginal external cost.

The Marginal Social Cost (MSC) curve represents the cost to society produced by an additional unit of a good. It is the sum of the Marginal Private Cost (MPC) and the Marginal External Cost (MEC). In the case of the Badger Paper Company (BPC), we can calculate the MSC using the equations provided for MPC and MEC. The equation for MPC is MPC(Q) = 20 + 0.25Q, and for MEC is MEC(Q) = 10 + 0.25Q. Adding these together gives us MSC(Q) = (20 + 0.25Q) + (10 + 0.25Q) = 30 + 0.5Q.

In terms of graphing these, the MPC, MEC, and MPB = MSB curves can be plotted using their respective equations. Importantly, the MSC curve (which is the sum of MPC and MEC) would appear above the MPC curve on a graph because it incorporates the external costs. This graph visually demonstrates the external costs or negative externalities associated with BPC's paper production.

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