Externalities Suppose the figure to the right illustrates the market for toilet paper, where S1 represents the MPC and D1 represents the MPB from consumption. Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and lakes, causing substantial environmental damage. Assume that S2 represents the MSC of producing toilet paper (that is, MSC incorporates the externality). a. In the absence of any government regulation, what 500- price and output would 450- prevail in the market? b. If firms did take into account these external costs, what would be the socially optimal price and quantity? c. What could the government do to get the firms to internalize the externality? Price (per ton of toilet paper) 400- 350- 300- 250- 200- 150- 100- 50- D₁ S2 S₁ 0 100 200 300 400 500 600 700 Quantity (1000 tons of toilet paper produced per week) 800 900 1000

Externalities Suppose the figure to the right illustrates the market for toilet paper, where S1 represents the MPC and D1 represents the MPB from consumption. Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and lakes, causing substantial environmental damage. Assume that S2 represents the MSC of producing toilet paper (that is, MSC incorporates the externality). a. In the absence of any government regulation, what 500- price and output would 450- prevail in the market? b. If firms did take into account these external costs, what would be the socially optimal price and quantity? c. What could the government do to get the firms to internalize the externality? Price (per ton of toilet paper) 400- 350- 300- 250- 200- 150- 100- 50- D₁ S2 S₁ 0 100 200 300 400 500 600 700 Quantity (1000 tons of toilet paper produced per week) 800 900 1000

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter12: Environmental Protection And Negative Externalities

Section: Chapter Questions

Problem 40P: Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in...

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Give an example of a positive externality and an example of a negative externality.
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