Consider the market for lumber, which we assume h to be perfectly competitive.

a. Suppose that for each unit of lumber produced, the firms also generate $10 of damage to the environment. Draw the social marginal cost curve in the diagram.
b. What is the allocatively efficient level of lumber output? Explain.
c. Describe and show the new market outcome if lumber producers are required to pay a tax of $10 per unit of lumber produced. Explain.
d. In part (c), does the equilibrium price of lumber rise by the full $10 of the tax? Explain.

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Sa D - MI Quantity of Lumber