## 10.5Solved Problem

### SOLVED PROBLEMThe Not So Sweet Smell of Success

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Americans have become passionate consumers of the Asian hot sauce, Sriracha. This red sauce with a rooster on the label can be found on condiment counters across the country. Fast-food chains like Pizza Hut and Subway have even created Sriracha-infused menu items such as honey Sriracha pizza crust and Sriracha chicken melt.

Sriracha is produced by Huy Fong Foods in Irwindale, California. Each year the company processes over 100 million pounds of chili peppers to make their delectable sauce. But roasting all of those chili peppers has had an unintended consequence: pollution. In 2013, local residents began complaining about a pungent odor from the plant that they believed led to heartburn, nosebleeds, and coughing.

The hypothetical table shows the estimated marginal social benefit (MSB) and marginal social cost (MSC) of pollution that arises from odor emissions. How can the pollution that results from Sriracha production have a marginal social benefit?

As we’ve seen, avoiding pollution requires using scarce resources that could have been used to produce other goods and services. The more pollution companies are allowed to emit, the lower the extra costs imposed on them. The social benefit from the pollution is the money the company saves by not having to invest in new equipment to reduce the odors that have resulted from Sriracha production. Generally, the costs of reducing pollution decrease with the amount of pollution that is allowed, so the marginal social benefit decreases as pollution increases.

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Table : Marginal Social Cost and Benefit of Odor
 Quantity of odoremissions (thousands of odor units) Marginal socialbenefit(\$ per odor unit) Marginalsocial cost(\$ per odor unit) 0 \$80 \$ 0 1 72 8 2 64 16 3 56 24 4 48 32 5 40 40 6 32 48 7 24 56 8 16 64 9 8 72 10 0 80

Graph the marginal social cost and marginal social benefit of odor. What is the market-determined quantity of odor? What is the social gain from reducing the market-determined quantity of odor by one odor unit?

STEP | 1 Draw and label marginal social benefit and marginal social cost curves. Find the optimal level of odor units.Review pages 288–289 and Figure 10-1.

The optimal social quantity of pollution is at the point where the marginal social benefit of polluting equals the marginal social cost of polluting. As shown in the accompanying figure, this occurs at point O, the intersection of the marginal social cost curve and the marginal social benefit curve. At point O, the optimal quantity of odor emissions is 5 thousand odor units and the marginal social benefit of odor emissions, which equals the marginal social cost of odor emissions, is \$40 per odor unit.

STEP | 2 Find the market-determined quantity of pollution.Review pages 289–290.

The market-determined quantity of pollution will be at the point where the marginal benefits to polluters are zero. As there are no marginal social benefits to pollution beyond the cost savings realized by the polluters themselves, the market-determined quantity will be at the point where the marginal social benefit of pollution is zero. This occurs at an odor emissions level of 10 thousand odor units, as shown at point A on the figure.

STEP | 3 Find the social gain from reducing the quantity of pollution by one odor unit from the market-determined level.Review pages 289–290.

Moving up from point A to point B in the figure, we can see that the marginal social cost of polluting at the market-determined level of 10 thousand odor units is high at \$80 per unit. The marginal social benefit at point A is zero. As the marginal cost per odor unit of polluting at a level of 10 thousand odor units is \$80 per unit and the marginal social benefit per unit of polluting at that level is zero, reducing the quantity of pollution by one odor unit leads to a net gain in total surplus of approximately \$80 − 0 = \$80.