Use the following to answer questions:
Figure: External Cost 1
-(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?
A) P = $4; Q = 30
B) P = $5; Q = 30
C) P = $6; Q = 50
D) P = $4; Q = 50

Question

Use the following to answer questions:
Figure: External Cost 1 
-(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?
A) P = $4; Q = 30 
B) P = $5; Q = 30 
C) P = $6; Q = 50 
D) P = $4; Q = 50

Quizplus · Accepted Answer

The intersection of the marginal private cost (MPC) curve and the demand curve would give the market equilibrium price and quantity in the absence of external costs, which is P = $4 and Q = 50. However, the presence of external costs shifts the supply curve upward to represent the total cost (private cost plus external cost) of producing the good. The intersection of the demand curve and the new supply (MC + external cost) curve gives the new equilibrium price and quantity, which is P = $4 and Q = 50. Thus, choice D is the correct answer.

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