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...
A recent study by Andrew Rose of the University of California showed that, on average, two countries that are members of the same currency union
A) trade three times as much with each other as countries that do not share a currency. B) trade twenty times as much with each other as countries that do not share a currency. C) trade ten times as much with each other as countries that do not share a currency. D) trade six times as much with each other as countries that do not share a currency. E) trade twice as much with each other as countries that do not share a currency.
The McCallum management principles advocate the use of
a. time-motion study to determine the most productive way to perform job-tasks. b. employee stock-purchase programs. c. internal accounting systems and performance evaluations. d. leveraged buy-outs to increase the firm's control of an industry.
In the above table, the cross price elasticity of demand for good B with good A when PA rises from $10 to $12 is
A. -0.58. B. +0.58. C. +1.83. D. +0.29.
If it is possible to make a change that will help some people without harming others, then the situation is:
A. efficient. B. inefficient. C. unfair. D. fair.