Final answer:
The refrigerator production scenario with a $100 pollution-related external cost only led to a $50 increase in market price, as indicated by Table 12.2, likely due to market dynamics or the firm absorbing some of the additional costs to remain competitive.
Step-by-step explanation:
Understanding the impact of external costs on market prices can be illustrated by the refrigerator production scenario. When a firm producing refrigerators considers its private production costs like labor and materials, and these additional external costs of pollution, the market dynamics shift. The external costs such as negative impacts on human health, property values, or wildlife habitat from pollution, add to the production expenses.
If the firm must internalize an external cost of $100 per refrigerator, one might expect the market price to increase by the same amount. However, as Table 12.2 indicates, the actual market price only rises by $50, suggesting that not all of the external costs are passed on to consumers. This discrepancy might occur because the firm absorbs some of the costs to maintain competitive pricing or due to other market dynamics such as price elasticity of demand.
When these costs are factored in and firms are compelled to pay for the additional external costs of pollution, production becomes more costly, resulting in a shift of the entire supply curve upward by $100. Nevertheless, the increase in price shown in Table 12.2 and illustrated by Figure 12.2 is only $50. This may be explained by the supply and demand elasticities within the market. A firm may absorb some costs or spread them over a large volume of production to avoid a full $100 price increase, thereby minimizing the increase in market price to only $50 while attempting to maintain sales volume and market share.