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1. Plastic grocery bags are nowadays a growing problem in the world, bags now are everywhere including the oceans where wildlife strange, choke and make the animals to die due to its consumption. They are cheap to produce and its durability is long. Let's suppose that an environmentally friendly company comes up with a substitute bag which is even cheaper to produce (therefore can sell it at a cheaper price), it is biodegradable and can be composted within days for its use in gardens and agriculture.
Given this information, answer the following questions:
a) Explain what would be the changes in the demand (curve) for this plastic bag substitute, assuming changes in the supply curve will remain constant. (Hint: is it a movement along the demand line, a shift? please explain the mechanism)
B) Given the situation in A) explain the new market conditions for this new bag in terms of price and quantity demanded.
2. It is well known that Environmental problems are modeled as market failures using Public goods and externality theories. What are the conditions needed to use the Public good theory, and what are the conditions to use the externality theory? Please differentiate them.
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