Question

Consider the PPF for clean air and automobile travel.

a. Explain why unregulated air pollution in automobiles would push a country inside its

PPF. Illustrate your discussion with a carefully drawn PPF for these two goods.

b. Next explain how putting a price on harmful automobile emissions would increase both

goods and move the country to its PPF. Illustrate by showing how correcting the “market

failure” would change the final outcome.

Step-by-step solution

Answer 1

A) Unregulated air pollution will translate to inefficiency thus causing the country to move inside the PPF.

B) When a price is set for the harmful emisions, this will help the country to manage it's pollution hence moving it towards efficiency.