Scenario: Currently, major corn-growing states, such as Iowa, use large amounts of nitrogen-based fertilizers. Many of Iowa's corn-growing regions are characterized by karst topography (water erodes the limestone bedrock and forms sinkholes, caves, and underground streams). In karst landscapes, runoff from corn fields contains high levels of nitrogen in the form of nitrates, which can pollute private and municipal water wells. Suppose the demand and supply for corn are:
Corn Demand: Qᴰ = 70 - 5p,
Corn Supply: Qˢ = 10p - 5,
where quantity is millions of bushels of corn and price is dollars per bushel. The marginal private benefit of corn and the marginal private cost of corn production can be derived by rewriting demand and supply with price as a function of quantity:
Inverse Demand: p = 14 - 0.2Q
Marginal Private Benefit: MPB = 14 - 0.2Q
Inverse Supply: p = 0.1Q + 0.5
Marginal Private Cost: MPC = 0.1Q + 0.5
Suppose the marginal external cost (MEC) of nitrogen fertilizer use in corn growing is a constant $1.50 per bushel, so MEC = 1.5. The marginal social cost (MSC) is:
MSC = MPC + MEC = 0.1Q + 0.5 + 1.5
MSC = 0.1Q + 2
The figure below shows these marginal benefits and marginal costs.

-Refer to the scenario above.The social optimum occurs at a price of ________ per bushel and a quantity of ________ bushels.
A) $4; 35 million
B) $5; 30 million
C) $5; 45 million
D) $6; 40 million

Suppose the Federal Government Implements a System of Tradeable Permits

Multiple Choice

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