Table 1 shows annual emissions and the estimated social cost created by a cement firm. Annual cement output (tonnes) Carbon emissions (tonnes) Estimated ext...
Question 1 Report
Table 1 shows annual emissions and the estimated social cost created by a cement firm.
| Annual cement output (tonnes) | Carbon emissions (tonnes) | Estimated external cost ($) |
|---|---|---|
| 10 000 | 4 000 | 80 000 |
| 15 000 | 6 000 | 120 000 |
| 20 000 | 8 000 | 160 000 |
(a) Calculate the estimated external cost per tonne of cement when output is 20 000 tonnes. [1]
(b) Explain why the firm's private costs may be lower than its social costs. [1]
Answer Details
(a) At an output of 20 000 tonnes, the estimated external cost is $160 000:
\[\frac{\$160\,000}{20\,000\text{ tonnes}}=\$8\text{ per tonne}\]
The estimated external cost is $8 per tonne of cement. [1]
(b) Private costs are costs paid by the cement firm itself. Social costs include these private costs plus pollution costs imposed on others. Since the firm does not pay these external pollution costs, its private costs may be lower than social costs. [1]
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