3.3. External effects. You strike oil on your property - and you own the mineral rights! Assume that there is no fixed cost to extracting this oil and that the marginal cost increases the more you extract, because it requires you to drill deeper. The total private cost and marginal private cost of extracting barrels of oil is given by the following equations:

C(Q)=20Q+Q2/2000

MPC=20+Q/1000

You are a price-taker, and the equilibrium price of oil is $50 per barrel. a. Draw a figure illustrating the price of oil and your marginal private cost of oil extraction. Label all curves and axes. P Q b. How many barrels of oil will you extract? What will be your revenue, cost, and profit? c. Combusting fossil fuels generates greenhouse gas emissions. Suppose that the marginal external cost of a barrel of oil is $20. Add the marginal social cost to your figure above, recalling that MSC = MPC + MEC. Is the equilibrium in b. efficient? (Note: A barrel of oil generates 0.43 metric tons of C02, which implies an external cost is $20/0.43 z 547 per ton of C02. This is similar to the Obama administration's estimates of the "social cost of carbon.\" By comparison, Prof. Nordhaus calculates that the cost of emissions must increase to approximately $230 per ton of CO2 to prevent more than 25C or warming.)