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The market for miking cows is illustrated below. It is commonly believed that animal feeding...

Question:

The market for miking cows is illustrated below. It is commonly believed that animal feeding operations, such as feedlots and dairies, create external costs when the manure from these facilities enter waterways, degrading water quality and gases from the manure enter the atmosphere contributing the GHG emissions.

Demand: {eq}p(q) = 3500-15q {/eq}

Supply: {eq}p(q) = 500+45q {/eq}

Assume that the external cost is $3 per milking cow.

Derive the first and second order conditions to determine optimal herd size under market conditions and under social planner conditions (q(m) and q(s), respectively).

Marginal Social External Cost:

Marginal social cost (MSC) refers to the total cost paid by the society for the production of another unit of a particular good or service. The cost of producing an additional unit of good or service is not only the direct cost undertaken by the producer, but also includes the costs imposed on the society and the environment as a whole. MSC is calculated as the total of marginal private cost and marginal external cost.

Answer and Explanation:

Market conditions:

Under this scenaro, the firm equates marginal private costs to marginal revenue to calculate optimal herd size:

  • 3500 - 30q = 500 + 45q, or
  • q(m) = 40

Social Planner:

Under this scenario, the firm is required to equates marginal social costs to marginal revenue to calculate optimal herd size:

  • 3500 - 30q = 500 + 48q, or
  • q(s) = 38.46

Learn more about this topic:

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Marginal Social Costs & Marginal Social Benefits

from AP Microeconomics: Exam Prep

Chapter 8 / Lesson 8
15K

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