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

Question

Quizplus · Accepted Answer

The marginal external cost (MEC) is the difference between the social marginal cost (SMC) and the private marginal cost (PMC). Given SMC = 10 + 2Q and PMC = 5 + Q, MEC = (10 + 2Q) - (5 + Q) = 5 + Q, which is increasing with Q.

A Paper Mill Discharges Chemicals into a River Which Washes