Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby...

 

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Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant marginal external cost (MEC) of $245 per ton. The following graph shows the demand (marginal private benetits, or MPH) curve and the supply (marginal private costs, or MPC) curve for paper. Use the purple points (diamond symbol) to plot the marginal social costs (MSC) curve when the marginal external cost is $245 per ton. 700 630 MSC 490 420 Supply (MPC) 20 210 Demand 140 (MPB) 70 QUANTITY (Tons of paper) The market equilibrium quantity is 4.5 v tons of paper, but the socially optimal quantity of paper production is3.5 tons To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a tax of $1 per ton of paper. PRICE (Dolars per ton of paper) Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant marginal external cost (MEC) of $245 per ton. The following graph shows the demand (marginal private benetits, or MPH) curve and the supply (marginal private costs, or MPC) curve for paper. Use the purple points (diamond symbol) to plot the marginal social costs (MSC) curve when the marginal external cost is $245 per ton. 700 630 MSC 490 420 Supply (MPC) 20 210 Demand 140 (MPB) 70 QUANTITY (Tons of paper) The market equilibrium quantity is 4.5 v tons of paper, but the socially optimal quantity of paper production is3.5 tons To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a tax of $1 per ton of paper. PRICE (Dolars per ton of paper)

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Due to the externality of 245 per ton the social cost lies above the supply curve such t... View the full answer