Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MCe = Q
What specific tax would result in a competitive market producing the socially optimal quantity of paper?
The socially optimal quantity of paper is found by setting MCp + MCe = p or
10 + Q + Q = 100 - Q. Rearranging yields Q = 30. At this level of output society incurs an external cost of 30. This is the specific tax that would yield the socially optimal quantity. To check, set
MCp + tax = 100 - Q. This yields Q = 30.
You might also like to view...
If the managers of the bus system found that revenues increase when fares are raised, they would conclude that price elasticity demand for subway service is inelastic
a. True b. False Indicate whether the statement is true or false
The demand curve any monopolist uses in making output decisions is:
a. the same as the demand curve facing a perfectly competitive firm. b. vertical, because there are no close substitutes for its product. c. horizontal, because there are no close substitutes for its product. d. the same as the market demand curve. e. perfectly inelastic.