A cement plant produces 200 tonnes of cement per day. Its private marginal cost is Rs.25 per tonne and it generates an external damage of Rs.12 per tonne. What is the total social cost of production per day?
Answer
Total social cost = Rs.7,400 per day
The correct answer is Total social cost = Rs.7,400 per day — Multiply SMC by total output (200 tonnes) to get total social cost: 37 200 = Rs.7,400.
Step-by-step solution
- Identify private marginal cost (PMC) = Rs.25 per tonne.
- Identify external damage per unit = Rs.12 per tonne.
- Add PMC and external damage to obtain social marginal cost (SMC) per tonne: SMC = 25 + 12 = Rs.37 per tonne.
- Multiply SMC by total output (200 tonnes) to get total social cost: 37 200 = Rs.7,400.
Common mistake: Forgetting to add the external damage to the private marginal cost
Concept tested: Social cost calculation
Published · How this solution was prepared and checked
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