AP® Microeconomics · Free response

Cement dust: a negative production externality, the external cost and why the efficient amount is not zero

write it first, then score yourself point by point

Short free-response question · four-function calculator · 5 points · about 12 minutes

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The question

Name: ______________________   Date: ____________   Cement dust: a negative production externality, the external cost and why the efficient amount is not zero (5 points)

In an invented region, many perfectly competitive firms make cement. Dust from the plants dirties nearby homes and costs residents $3 for every ton of cement produced. No one outside the market gains from it, and the plants do not pay for the damage.

  1. (A) Draw a correctly labeled graph of the cement market showing demand, supply and marginal social cost. Show the socially efficient quantity, labeled QE. [2 points]

  2. (B) Shade the area that shows the total external cost of the dust at the market quantity. [1 point]

  3. (C) Explain why the socially efficient quantity of cement is not zero, even though every ton produces dust. [1 point]

  4. (D) Suppose the dust damage were $5 a ton instead of $3. Identify what would happen to the deadweight loss of the market outcome, and explain. [1 point]