6. A paper mill discharges chemicals into a river that washes the shores of a downstream resort area. The private cost, social cost, and marginal benefit associated with the production of paper are given by the following equations: PMC = 5+Q, SMC = 10 + 2Q, and MB = 35 -0.5Q. a. Provide a labelled diagram to illustrate how the competitive free market will not produce the socially optimal amount of output. b. Illustrate the efficiency loss. C. Illustrate how a per-unit tax could be used to correct this problem.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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6.
A paper mill discharges chemicals into a river that washes the shores of a downstream resort area. The private
cost, social cost, and marginal benefit associated with the production of paper are given by the following
equations: PMC = 5 + Q, SMC = 10 + 2Q, and MB = 35 -0.5Q.
a.
Provide a labelled diagram to illustrate how the competitive free market will not produce the socially
optimal amount of output.
b.
Illustrate the efficiency loss.
C.
Illustrate how a per-unit tax could be used to correct this problem.
Transcribed Image Text:6. A paper mill discharges chemicals into a river that washes the shores of a downstream resort area. The private cost, social cost, and marginal benefit associated with the production of paper are given by the following equations: PMC = 5 + Q, SMC = 10 + 2Q, and MB = 35 -0.5Q. a. Provide a labelled diagram to illustrate how the competitive free market will not produce the socially optimal amount of output. b. Illustrate the efficiency loss. C. Illustrate how a per-unit tax could be used to correct this problem.
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