A paper mill discharges chemicals into a river which washes the shores of a downstream resort area.The private marginal cost,social marginal cost,and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q,MCS = 10 + 2Q,and MB = 35 - 0.5Q.The marginal external cost at the allocatively efficient level of output is

Question

Quizplus · Accepted Answer

The allocatively efficient level of output is where the social marginal cost (MCS) equals the marginal benefit (MB). Therefore,
10 + 2Q = 35 - 0.5Q
2.5Q = 25
Q = 10
At this output level, the private marginal cost (MCP) is 5 + 10 = 15.
Therefore, the marginal external cost is:
MEX = MCS - MCP
MEX = 10 + 2Q - (5 + Q)
MEX = 5 + Q
MEX = 5 + 10
MEX = 15
So the correct answer is C.

A Paper Mill Discharges Chemicals into a River Which Washes