Figure 5.5

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
-Refer to Figure 5.5.The private profit-maximizing output level is

Question

Figure 5.5
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
-Refer to Figure 5.5.The private profit-maximizing output level is

Quizplus · Accepted Answer

The private profit-maximizing output level is where the marginal cost (MC) equals marginal revenue (MR), which is at point Q₃ in the figure. At this point, the firm is producing a quantity of Q₃ at a price of P₃. However, this output level does not consider the environmental damage caused by the discharge of bleach into rivers and lakes. Therefore, to account for the negative externality, the socially optimal output level should be lower than Q₃. At the socially optimal output level, the marginal social cost (MSC) is equal to the marginal social benefit (MSB), which is at point Q₂. This level of output reduces the environmental damage caused by bleach discharge and increases social welfare.

Figure 5.5 Companies Producing Toilet Paper Bleach the Paper to Make It