Identify the Marginal External Benefit (MEB) function, and briefly explain what this function is measuring.
Suppose you are a public official responsible for setting a retail disposal charge on antifreeze. Estimated marginal benefit and cost functions for antifreeze are as follows:
MPB = 10.0 – 0.5Q MPC = MSC = 1.0 + 0.4Q
MSB = 10.0 –1.1Q,
whereMPB, MSB, and MPC are measured in dollars per gallon, and Q is in millions of gallons.
MSB = MPB + MEB.
Therefore, MEB = MSB – MPB = 10.0 – 1.1Q – 10 – 0.5Q = –0.6Q
The MEB function measures the external effects on society associated with the consumption of antifreeze. In this case, for each additional million gallons of antifreeze consumed, the negative external benefit, or the MEB, rises by 60 cents per gallon. Thus, the MPB associated with antifreeze consumption overstates the true marginal benefits to society.
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