There is concern that CFCs, a chemical by-product of refrigeration, are destroying Earth’s protective ozone layer, leaving us more vulnerable to cataracts and skin cancer. Suppose each air conditioner creates 10 pounds of CFCs. The demand and supply of air conditioners follow:
Price (dollars)
400
350
300
250
200
Quantity demanded
10
12
14
16
18
Quantity supplied
18
16
14
12
10
What will be the free-market price and quantity, and what will be the price and quantity if the government forces suppliers to pay a $100 tax for each air conditioner produced?
What will be an ideal response?
The free-market equilibrium occurs at Q = 14, P = 300. If producers must pay $100 to government, equilibrium occurs when quantity demanded equals quantity supplied and price paid by consumers exceeds price received by producers by $100. The new equilibrium price is $350, and quantity is 12. Producers net $250.
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