Now draw a diagram of the market for oranges. Explain how the government policy you discussed in part (b) of Problem 5-2 is likely to affect the market price and equilibrium quantity in the orange market. In what sense do consumers of oranges now “pay” for dealing with the spillover costs of pesticide production?

Problem 5-2

Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in almost all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges

a. Use a diagram of the market for the pesticide to illustrate the implications of a failure of orange producers’ costs to reflect the social costs of groundwater contamination.

b. Use your diagram from part (a) to explain a government policy that might be effective in achieving the amount of orange production that fully reflects all social costs.

 

Q