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 at the allocatively efficient level of output is

Question

Quizplus · Accepted Answer

To find the marginal external cost (MEC) at the allocatively efficient level of output, we need to first find the socially optimal level of output, where SMC = MB.

10 + 2Q = 35 - 0.5Q

2.5Q = 25

Q = 10

Therefore, the socially optimal level of output is 10.

To find the MEC, we need to find the difference between the social cost and the private cost at this level of output:

MEC = SMC - PMC = (10 + 2Q) - (5 + Q) = 5 + Q

MEC = 5 + 10 = 15

Therefore, the MEC at the allocatively efficient level of output is 15.

A Paper Mill Discharges Chemicals into a River Which Washes