Scenario
The island nation of Autarka is growing concerned over the amount of rubbish accumulating in the waters o its coastline. This pollution is harming marine life, damaging sh stocks, and washing up on tourist beaches. Research by the National University of Autarka has determined that a signi cant component of the solid waste is the single-use plastic bottles used by soft-drink manufacturers.
Currently, soft drink manufacturers in Autarka pay a tax of $0.40 on each bottle of drink they sell. The revenue from the tax is used to fund the cleaning of roads and public spaces. The scienti c community is lobbying the government to increase the tax to $1.00 a bottle. The scientists suggest that any additional revenue could be used to fund programs to remove rubbish from the coastal waters.
There are two producers of soft drinks in Autarka: Bubbles PLC and CarbonCorp. The two companies do not face competition from imports as the cost of transporting soft drinks into Autarka is prohibitively high. Moreover, there are no cost e ective alterna-tives to single use plastic containers. The two companies have made submissions to the government opposing the proposed tax increase, which they claim will harm consumers.
Task
The Minister for the Environment has instructed you to determine the likely impact of the proposed tax increase on the market for soft drinks, and to recommend whether or not the government should implement the proposed tax increase. Your recommendation should take into account the impact on government revenues, the impact on consumers, and the impact on the environment.
Note that competition policy prevents the government from imposing any other form of market regulation, including price controls.
Industry structure
Research into the soft drink market indicates that the two rms compete by selecting quantities (Cournot competition). Soft drinks are regarded as a homogeneous good by consumers, and inverse demand in the market is estimated to be,
where P represents the price of a bottle of soft drink, and Q is the total number of bottles sold per year.
At present soft drinks sell for $3.80 a bottle. Bubbles PLC produces 140,000 bottles per year, paying $56,000 in bottle tax. CarbonCorp produces 80,000 bottles and pays $32,000. It is estimated that it costs Bubbles PLC $2.00 per bottle of soft drink produced, while producing a bottle of soft drink cost CarbonCorp $2.60. The xed costs of production can be neglected in this analysis.
Industry analysis
For your industry analysis you must complete each of the steps detailed below. The required analysis draws on content covered in lectures 6{10 (primarily lecture 9). When completing the steps you must:
Type all equations using the ‘Insert Equation’ function (or equivalent). Show all of your working.
Include su cient written description for the reader to follow your process. (Use the worked solutions in the study guide as an indication of the required level of detail.)
Use appropriate economic terminology.
Your audience for the industry analysis is other expert economists who may be required to review your work. There is no page limit for the Industry Analysis.
Required Steps
When completing the industry analysis you should assume that rms are engaged in Cournot Competition.
Step 1: Using the information provided in the scenario, derive a total cost function for each soft drink producer for the case in which the government levies a tax of $1.00 per bottle. Use QB to denote the quantity produced by Bubbles PLC, and QC to denote the quantity produced by CarbonCorp. Note that a rm’s marginal cost will be the sum of its cost of producing a bottle, and the tax that it must pay to the government on each bottle sold.
Step 2: Using the cost functions from step 1, derive a pro t function for each rm.
Step 3: Derive each rm’s best-response function.
Step 4: Solve the best-response functions simultaneously to nd the equilibrium quantities for each rm.
Step 5: Find the equilibrium price and tax revenue.
The post The island nation of Autarka is growing concerned over the amount of rubbish accumulating in the waters o its coastline appeared first on Homeworkaider.
What Students Are Saying About Us
.......... Customer ID: 12*** | Rating: ⭐⭐⭐⭐⭐"Honestly, I was afraid to send my paper to you, but you proved you are a trustworthy service. My essay was done in less than a day, and I received a brilliant piece. I didn’t even believe it was my essay at first 🙂 Great job, thank you!"
.......... Customer ID: 11***| Rating: ⭐⭐⭐⭐⭐
"This company is the best there is. They saved me so many times, I cannot even keep count. Now I recommend it to all my friends, and none of them have complained about it. The writers here are excellent."
"Order a custom Paper on Similar Assignment at essayfount.com! No Plagiarism! Enjoy 20% Discount!"
