ECS3704 Assignment 1
(COMPLETE ANSWERS)
Semester 2 2024
100% GUARANTEED
, ECS3704 Assignment 1 (COMPLETE ANSWERS)
Semester 2 2024
Analyse with the aid of a diagram, why it may be
necessary for government to intervene in the case of
pollution created by steel production. Using the same
diagram, explain the policy options at the disposal of
government to address this issue.
To analyze why government intervention may be necessary in the case of pollution from steel
production, we can use the economic concept of externalities. Pollution is a common example of
a negative externality, where the production or consumption of a good imposes a cost on a third
party. Steel production can lead to significant environmental damage, affecting air and water
quality, which harms public health and the environment.
A typical diagram used to explain this is the Marginal Social Cost (MSC) and Marginal
Private Cost (MPC) diagram. Here’s how it works:
Diagram Explanation
1. Axes:
o X-axis: Quantity of steel produced.
o Y-axis: Cost or price per unit.
2. Curves:
o Marginal Private Cost (MPC): This represents the cost of production borne by
the steel producer. This is the supply curve without considering externalities.
o Marginal Social Cost (MSC): This curve is above the MPC curve and represents
the total cost to society, including the external costs of pollution.
o Demand (D): This represents the demand for steel, reflecting the marginal benefit
to consumers.
3. Equilibrium Points:
o Market Equilibrium (E1): The point where the MPC intersects the demand
curve (D). At this point, the quantity of steel produced is Q1, and the price is P1.
This equilibrium does not account for the external costs of pollution.
o Socially Optimal Equilibrium (E2): The point where the MSC intersects the
demand curve. At this point, the quantity of steel produced is Q2, and the price is
P2. This equilibrium considers the full cost to society, including externalities.
Why Government Intervention is Necessary
Market Failure: In the absence of government intervention, the market equilibrium (E1)
results in overproduction of steel (Q1 > Q2) and underpricing (P1 < P2) because the
external costs are not included in the production decision.
(COMPLETE ANSWERS)
Semester 2 2024
100% GUARANTEED
, ECS3704 Assignment 1 (COMPLETE ANSWERS)
Semester 2 2024
Analyse with the aid of a diagram, why it may be
necessary for government to intervene in the case of
pollution created by steel production. Using the same
diagram, explain the policy options at the disposal of
government to address this issue.
To analyze why government intervention may be necessary in the case of pollution from steel
production, we can use the economic concept of externalities. Pollution is a common example of
a negative externality, where the production or consumption of a good imposes a cost on a third
party. Steel production can lead to significant environmental damage, affecting air and water
quality, which harms public health and the environment.
A typical diagram used to explain this is the Marginal Social Cost (MSC) and Marginal
Private Cost (MPC) diagram. Here’s how it works:
Diagram Explanation
1. Axes:
o X-axis: Quantity of steel produced.
o Y-axis: Cost or price per unit.
2. Curves:
o Marginal Private Cost (MPC): This represents the cost of production borne by
the steel producer. This is the supply curve without considering externalities.
o Marginal Social Cost (MSC): This curve is above the MPC curve and represents
the total cost to society, including the external costs of pollution.
o Demand (D): This represents the demand for steel, reflecting the marginal benefit
to consumers.
3. Equilibrium Points:
o Market Equilibrium (E1): The point where the MPC intersects the demand
curve (D). At this point, the quantity of steel produced is Q1, and the price is P1.
This equilibrium does not account for the external costs of pollution.
o Socially Optimal Equilibrium (E2): The point where the MSC intersects the
demand curve. At this point, the quantity of steel produced is Q2, and the price is
P2. This equilibrium considers the full cost to society, including externalities.
Why Government Intervention is Necessary
Market Failure: In the absence of government intervention, the market equilibrium (E1)
results in overproduction of steel (Q1 > Q2) and underpricing (P1 < P2) because the
external costs are not included in the production decision.
