Final answer:
The store sets the refrigerator price at $1000 using their pricing formula. The market price increases by $50, not the full $100 externality cost, due to market forces and elasticity affecting final price shifts. The new equilibrium price is set at $700, with the firm covering some of the external cost of pollution.
Step-by-step explanation:
To address the student's question about pricing strategy we first need to understand the given formula by the appliance store: Price = Actual Cost + (25 percent of Actual Cost). The actual cost of a refrigerator is $800, hence the price would be $800 + (0.25 × $800) = $800 + $200 = $1000. Therefore, the store will set the price for the refrigerator at $1000.
Considering the provided context of externalities, the reason why the market price increased by only $50 instead of $100 when accounting for external costs has to do with how externalities are internalized in the market. The original scenario assumes no anti-pollution restrictions, allowing firms to produce without considering the negative pollutants. However, when firms are required to pay for these external costs, it reflects in the supply curve as an increased cost of production, shifting the supply curve upward. This doesn't mean that all costs are passed on to the consumer dollar-for-dollar; the increase in price will depend on market dynamics, including supply and demand elasticity.
Table 12.2 and Figure 12.2 illustrate the new equilibrium price as being $700 per refrigerator after accounting for the external cost of pollution. This implies that the price had to accommodate both the private and additional external costs, leading to a revised supply curve labeled Ssocial. The actual market price increase to $750 (in this hypothetical scenario) aligns with the intermediate position between bearing the whole external cost and the firm's willingness to absorb some of that cost or find other efficiencies to offset it. This example demonstrates how environmental economics can influence pricing strategies and production quantities in response to pollution costs.