1.8. Planting a tree improves the environment: trees transform greenhouse gases into oxygen, improve water retention in the soil, and improve soil quality. Assume that the value of this environmental improvement to society is $10 for the expected lifetime of the tree. The following table contains a hypothetical demand schedule for trees to be planted.

a. Assume that the marginal cost of producing a tree for planting is constant at $20. Draw a diagram that shows the market equilibrium quantity and price for trees to be planted.

b. What type of externality is generated by planting a tree?
Draw a diagram that shows the optimal number of trees planted. How does this differ from the market outcome?

c. On your diagram from part

b, indicate the optimal Pigouvian tax/subsidy (as the case may be). Explain how this moves the market to the optimal outcome.

Transcribed Image Text:

Price of tree $30 25 20 15 Quantity of trees demanded (thousands) 0 6 12 18 24 10 5 30 0 36