A paper mill discharges chemicals into a river which affect 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.What level of emissions tax (dollars per unit of output produced)would provide the paper mill with the incentive to produce at the allocatively efficient level of output?

Question

Quizplus · Accepted Answer

The allocatively efficient level of output occurs where the social marginal cost (SMC) equals the marginal benefit (MB). Setting SMC = MB gives 10 + 2Q = 35 - 0.5Q. Solving for Q gives Q = 10. The private marginal cost (PMC) at this level is 5 + 10 = 15. The emissions tax should equal the difference between SMC and PMC at the efficient output level, which is 15 - 5 = $10. Therefore, the tax should be $10 per unit.

A Paper Mill Discharges Chemicals into a River Which Affect