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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Of course, you will need to make the graphs (Part A) on your own.  For the supply and demand curves, just use the numbers already provided.  The marginal external cost curve should be a straight line because every ton of paper produced costs $60 in external costs.  This means the marginal external cost is always the same.  To get the marginal social cost curve, add the $60 to the marginal cost as determined by the numbers in the table.

You can determine the equilibrium market price and quantity just by looking at the table.  At the price of $130 per ton, the quantity supplied and demanded are identical.  This is the equilibrium point.  To find the socially optimal price, you would need to draw a new supply curve that has the same slope but is $60 higher (to the left) at each point.  The socially optimal price and quantity will occur where that new supply curve intersects with the demand curve.

If the government imposes a $60 tax on every ton of paper produced, the result should be the same as your socially optimal price and quantity.  This is because the government would be forcing the company to account for the entire cost of making paper.  For this same reason, Option i in Part D would have the same impact.


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