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ECS3704 Assignment 1 Semester 2 2024
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ECS3704 Assignment 1 Semester 2 2024 QUESTIONS WITH ANSWERS
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ECS3704 Assignment1 Semester 2 2024
QUESTIONS WITH COMPLETE ANSWERS
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, ECS3704 Assignment 1 Semester 2 2024
Analyse with the aid of a diagram, why it may be necessary for government to intervene in the
case of pollution created by steel production. Using the same diagram, explain the policy options
at the disposal of government to address this issue.
To analyze why government intervention might be necessary in the case of pollution created by
steel production, we can use the concept of negative externalities. Pollution is a classic example
of a negative externality, where the social cost of production exceeds the private cost incurred by
the producer. This leads to market failure, as the market does not account for the full social costs,
resulting in overproduction of the good (steel) and excessive pollution.
Diagram Explanation:
Below is a description of the diagram you can draw:
1. Axes:
o X-axis: Quantity of steel produced (Q)
o Y-axis: Cost/Price of steel (P)
2. Curves:
o Marginal Private Cost (MPC): This is the cost borne by the steel producer for
each unit of steel produced. It reflects the supply curve in a competitive market.
o Marginal Social Cost (MSC): This is the true cost to society for each unit of
steel produced, including the external cost of pollution. The MSC curve lies above
the MPC curve, reflecting the additional costs due to pollution.
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