1)When a natural monopoly is regulated using a marginal cost pricing rule, what can you say about the firm's profit and the market's efficiency?

2)Analyze the externalities concerning optimal levels of pollution and make at least one recommendation for the most economically viable way to proceed over the next 20 years. Explain your rationale.

1)In a natural monopoly, the average total cost is lower as more units are produced. It is always greater than the marginal cost. The marginal cost is the costs incurred for the additional number of units produced. Marginal cost is affected when more variable costs are incurred. Since natural monopoly has a higher ratio of fixed costs than variable costs, the marginal cost is less affected. A marginal pricing rule is used when a firm sets the price of its product equal to its marginal cost. This will lead to a negative profit as the total cost (based on average total cost) is greater than the revenue earned (based on the marginal cost).The marginal cost pricing rule will result in market's efficiency. The firm is able to use allocate its resources effectively to achieve the maximum number of outputs produced.

2)

The externalities associated with optimal pollution levels can be categorized into three areas:1) economic, 2) social, and 3) environmental externalities. Economic externalities refer to the monetary costs that arise as a result of pollution. For instance, let's say that a chemical company dumps their waste on the ground. As time goes by, the land adjacent to the company's also becomes affected by the chemical composition, resulting in reduced fertility levels among residents. Additionally, the land cannot be used productively for agricultural activities, which is an economical cost.

Social externalities refer to the collective and community costs incurred as a result of pollution. An excellent example of this would be the medical expenses incurred to treat diseases primarily caused by pollution. Lastly, environmental externalities refer to habitat-related costs. These are incurred as ecosystems become susceptible to pollution. For example, companies like Chevron are responsible for a relatively large part of the world's carbon emissions. These emissions have led to increased global warming, which is the major cause of significant climate change that can be attributed as the primary cause of droughts, wildfires, and rising sea levels, all of which have to be mitigated by the government.

The most economically viable way to reduce pollution is to use capped allowance systems. Practically speaking, putting a cap on pollution levels, a polluter can significantly limit their effect on the environment while ensuring that they can continue doing business. It also makes room for other companies' entrance into the industry without worrying about pollution levels since they can be regulated. Chevron, which is headquartered in California, is regulated by the state's cap and trade bill.