-Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tonnes of leather are produced?
A) 300 tonnes
B) 0 tonnes
C) 200 tonnes
D) More than 300 tonnes
E) More than 0 tonnes and less than 200 tonnes

Question

-Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tonnes of leather are produced?
A) 300 tonnes 
B) 0 tonnes 
C) 200 tonnes 
D) More than 300 tonnes 
E) More than 0 tonnes and less than 200 tonnes

Quizplus · Accepted Answer

The efficient quantity is where the marginal social cost (MSC) equals the marginal benefit (MB). The MSC is the marginal private cost (MPC) plus the marginal external cost (MEC). The MEC is the cost of the pollution created by producing one more unit of leather. The government can set a pollution limit that achieves efficiency by setting the limit equal to the MEC. This will ensure that the MPC plus the MEC equals the MB, and the efficient quantity will be produced. In this case, the MEC is $100 per tonne of leather, so the government would set the pollution limit at 100 tonnes of leather. This would result in the production of 300 tonnes of leather, which is the efficient quantity.

-Producing Leather Creates External Costs in the Form of Water