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) of producing toilet paper equals the marginal revenue (MR) of selling it, which occurs at point Q1 on the supply curve. However, at this output level, the production involves using bleach, which causes substantial environmental damage. The social cost of producing toilet paper is higher than the private cost, and the marginal external cost (MEC) of the bleach is represented by the vertical distance between S1 and S2 curves at point Q1. Therefore, to achieve allocative efficiency, the output level should be where the marginal social cost (MSC) equals the marginal social benefit (MSB), which occurs at point Q2 on the demand curve. At this output level, the price is P2 and the quantity is Q₃, which is the intersection of the demand and MSC curves. Hence, the best choice is C.