Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by:
A)banning production of paper.
B)compensating those injured by the externality.
C)imposing a tax on paper equal to the external cost.
D)subsidizing paper by the amount of the external benefit.

Question

Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by: 
A)banning production of paper. 
B)compensating those injured by the externality. 
C)imposing a tax on paper equal to the external cost. 
D)subsidizing paper by the amount of the external benefit.

Quizplus · Accepted Answer

Imposing a tax on paper equal to the external cost will increase the cost of production for paper manufacturers and thus reduce the supply and demand for paper. This will result in a decrease in the quantity of paper produced and consumed, which will eventually reduce the negative externality caused by paper production. This is the most efficient way to achieve the socially optimal level of production in the absence of negotiation. The other options, such as banning the production of paper or compensating those injured by the externality, may not be practical or may result in additional costs or unintended consequences. Subsidizing paper by the amount of the external benefit also may not be effective because it would encourage more production and consumption of paper, leading to even more negative externalities.

Refer to the Figure Below