9. Crude Oil Negative Externality - Surplus Analysis
Based on Handwritten Notes pp. 8-10 (uses same table as vaccination, with MEC=$20)
Problem Setup
Crude oil produced in competitive market. Each unit generates negative externality = $20/unit. No external benefit. Uses the same numerical values as the vaccination table.
| Q | MPB=MSB | MPC | MEC | MSC=MPC+MEC |
|---|---|---|---|---|
| 1 | 100 | 60 | 20 | 80 |
| 2 | 90 | 70 | 20 | 90 |
| 3 | 80 | 80 | 20 | 100 |
| 4 | 70 | 90 | 20 | 110 |
- Market equilibrium: MPB = MPC at Q=3 (MPB=80, MPC=80), P*=80
- Efficient point: MSB = MSC at Q=2 (MSB=90, MSC=90), P1=90
- Corrective Tax = MEC = $20
Interactive Surplus Chart
Effects of Corrective Tax (4-Step Decomposition)
Before tax: Produces Q=3 at P=80. After tax: Produces Q=2, receives P-Tax = 90-20 = $70.
Lost revenue on remaining units: 2 units x ($80-$70) = -$20
Lost profit on unit 3: triangle = 1/2 x (80-70) x 1 = -$5
Total producer loss: -$25
Before: Buys Q=3 at P=$80. After: Buys Q=2 at P=$90.
Pays more on remaining units: 2 x ($90-$80) = -$20 (loss to consumer)
Loses surplus on unit 3: triangle = 1/2 x (80-80) x 1 + area = -$5
Total consumer loss: -$25
Reduction in external damage: unit 3 is no longer produced, saving MEC = $20 of pollution damage.
Third party gain = $20
Tax revenue = Tax per unit x Quantity = $20 x 2 = $40
This can be used to compensate affected parties or fund public services.
CORRECTION NOTE: Original Notes Had Arithmetic Error
The original handwritten notes showed producer and consumer surplus changes as -35 each, giving a net of -10. This was a simple arithmetic error: (10 x 2) + (1/2 x 10 x 1) = 20 + 5 = 25, not 35.