1) A paper mill dumps waste into a lake used by a catfish farmer. The table above shows costs and benefits arising from the production of paper. a) Draw the paper mill's marginal private cost curve, the marginal social cost curve, and the marginal social benefit of paper curve. b) What is the efficient level of paper production? If no one owns the lake and there is no regulation of pollution, what is the quantity of paper produced per week? Illustrate the deadweight loss in your figure. c) If the government introduces a Pigovian tax, what is the tax per ton of paper produced that achieves an efficient outcome? What is the amount of the tax?
7 Extended Problems
|
Quantity of paper produced (tons per week) |
Paper mill's marginal cost (dollars per ton) |
Catfish farmers' marginal cost from pollution (dollars per ton) |
Marginal social benefit of paper (dollars per ton) |
|
10 |
10 |
5 |
55 |
|
20 |
15 |
10 |
45 |
|
30 |
20 |
15 |
35 |
|
40 |
25 |
20 |
25 |
|
50 |
30 |
25 |
15 |
|
60 |
35 |
30 |
5 |
1) A paper mill dumps waste into a lake used by a catfish farmer. The table above shows costs and benefits arising from the production of paper.
a) Draw the paper mill's marginal private cost curve, the marginal social cost curve, and the marginal social benefit of paper curve.
b) What is the efficient level of paper production? If no one owns the lake and there is no regulation of pollution, what is the quantity of paper produced per week? Illustrate the
c) If the government introduces a Pigovian tax, what is the tax per ton of paper produced that achieves an efficient outcome? What is the amount of the tax?
d) If the catfish farmer owns the lake, how much paper is produced per week and what does the paper mill pay the farmer per ton? Explain you answer.
e) If the paper mill owns the lake, how much paper is produced per week? Explain.
f) Compare the quantities of paper produced in (c) and (d) and explain the relationship between these quantities.
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