Question

a. Suppose that the carbon sequestration that results from planting a tree is worth $4. Graph the social cost curve that accounts for the 10 points positive externality of trees. Instructions: Use the tool provided (MCsocial to draw the social cost curve and plot only the two endpoints across the range of output 0-100 b. Ignoring the positive externality, ____ trees will be planted. c. The socially optimal quantity of trees is ____. trees d. Graph the deadweight loss that occurs when suppliers are unable to capture the $4 external benefit they provide from planting trees.

Answer 1

The social cost curve with a $4 carbon sequestration benefit per tree should reflect the positive externality, indicating a socially optimal quantity of trees that's higher than the private equilibrium. Deadweight loss occurs due to the market underproducing trees without capturing the external benefit.

Step-by-step explanation:

When analyzing the positive externality of carbon sequestration from planting trees, we consider the social cost curve with the externality included. With a $4 per tree sequestration value, the social cost curve (MSC) should be graphed to reflect this benefit.

Ignoring the positive externality, the private market may only plant trees where the private cost equals private benefit without considering the additional $4 social benefit. Therefore, fewer trees will be planted at this original equilibrium.

The socially optimal quantity of trees is higher than the private equilibrium quantity, as it takes into account the $4 benefit to society per tree for their carbon sequestration. It is where the marginal social benefit (MSB) equals the marginal social cost (MSC).

The deadweight loss occurs because the market underproduces trees relative to the socially optimal level. It is graphically represented by the area between the MSC curve accounting for the externality and the demand curve (MSB) from the original quantity to the socially optimal quantity of trees.