Figure 5-9 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 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.The private profit-maximizing output level is

Question

Figure 5-9  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 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.The private profit-maximizing output level is

Quizplus · Accepted Answer

The private profit-maximizing output level is where the marginal cost (MC) equals the marginal revenue (MR), which is at point U1 in Figure 5-9. At this output level, the price is P1 and the quantity is Q1. However, this output level results in negative externalities due to the environmental damage caused by the discharge of bleach into rivers and lakes. Therefore, the socially optimal output level is where the marginal social cost (MSC) equals the marginal social benefit (MSB), which is at point U2 in Figure 5-9. At this output level, the price is P2 and the quantity is Q2. Since Q2 is less than Q1, the market is producing too much toilet paper from a social perspective. To achieve the socially optimal output level, the government can impose a tax on toilet paper producers equal to the external cost of the environmental damage, which would shift the supply curve to the left to S2 and result in an output level of Q₃ at price P3.

Figure 5-9 Companies Producing Toilet Paper Bleach the Paper