I need help with microeconomics please 5. The effect of negative externalities o

Question

I need help with microeconomics please

5. The effect of negative externalities on the optimal quantity of consumption Aa Aa Suppose that a paper factory in New York 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 of $525 regardless of the level of production. There is no marginal external benefit from paper production, so the private benefit equals the benefit to soclety. The following table summarizes the private benefit and marginal cost for each level of output from the paper factory Quantity of Paper (Tons) Private Benefit Marginal Cost 1,275 1,050 825 600 450 375 75 225 300 450 600 750 4 The following graph shows the demand curve and the marginal cost curve for paper. (Note: The demand for the factory's paper is the same as the full-benefits demand curve.) On the graph, use the purple points (diamond symbol) to plot the full-cost supply curve. Line segments will automatically connect the points. Remember to plot from left to right.

Explanation / Answer

the market quantity is 4.5 tons,but efficient quantity of paper production is 3 tons . At 3 tons MSB=MSC

525+300=825.

To create an incentive for the firm to produce the efficient quantity of paper,the government could impose more tax on per ton of paper produced as it will increase MC thus reducing supply.

When a purely competitive industry is in a long-run equilibrium, quantity supplied equals quantity demanded (this is the profit maximizing quantity) AND therefore marginal social cost equals marginal social benefit(MSC = MSB), this is the allocatively efficient quantity.

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