Question 1 Developing countries are in a haste to transform their economies. This requires establishing manufacturing companies. However, such manufacturing firms can generate externalities through the production processes. Suppose that, a new oil processing factory, Jonat Oil Limited, is situated on the bank of Lake Volta. The private marginal cost (PMC) of producing oil (in GH per metric tonne) is given by the function, PMC = Q + 15, where Q is metric tonnes of oil produced. In addition to this private marginal cost, a marginal external cost (MEC) is created. The social marginal benefit (SMB) to society of oil production is given as, SMB = 35 - Q. Assume that each metric tonne of oil produces a pollutant which flows into Lake Volta, causing damage valued at GH 5. This is an external cost, as it is borne by the wider Lake Volta user community but not by the polluting firm. On the basis of these: (a) Calculate and interpret the output and price of oil production if it is produced under market conditions. (1 Mark) (b) Determine the socially efficient price and output of oil production if government forces the firm to correct the damages. (2 Marks) (c) How large should per unit of MEC has to be in order for it to be socially desirable that no output is produced? (2 Marks) (d) Assuming the government wants to use a command and control policy to achieve the same efficient outcomes as in Pigouvian taxes, where should output be restricted to? Discuss two practical problems associated with using such quantity restriction on this externality from a typical African country perspective. (3 Marks) AERC Page 1 of 4 (e) Sketch a diagram illustrating the private marginal cost (PMC), Social marginal benefit (SMB), marginal external cost (MEC), social marginal cost (SMC) functions and all other relevant results obtained in question one (1). (3 Marks) (f) Calculate the deadweight loss to society as a result of the internalisation of the external (2 Marks) cost. (g) Will the welfare loss due to the firm's overproduction be better than the case when the firm was asked to internalise the externality? (2 Marks) Question 2 (a) Government policy usually has two main goals, relating to welfare, for society. This welfare hinges on efficiency and equity outcomes of economic activities, which influence the standard of living of members of society. Critically examine the views of the egalitarian and utilitarian on equity of economic outcomes, making reference to your country. (8 Marks) (b) Market failures are critical market issues of concern to governments of all economies. By using diagrams and specific examples, explain the difference between negative consumption externality and positive production externality. In each case, explain why the market fails and recommend one possible policy action to correct each market failure. (7 Marks)