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 = Z + 2Q, and MB = 35 - 0.5Q. What is the level of Z for which the marginal external cost at the competitive free- market equilibrium is zero?

Question

Quizplus · Accepted Answer

The marginal external cost is equal to the difference between the social marginal cost and the private marginal cost. At the competitive free-market equilibrium, the marginal external cost is zero. Therefore, the social marginal cost must be equal to the private marginal cost. The social marginal cost is equal to Z + 2Q, and the private marginal cost is equal to 2Q. Therefore, Z must be equal to -15.

A Paper Mill Discharges Chemicals into a River Which Washes