Post by: desireelg_7 on Nov 23, 2022
The graph shows the marginal cost (MC), the marginal social cost (MSC), and the marginal benefit (MB) of producing paper at a paper mill, which contributes to water pollution.
Assume that P1=$194, P2=$223, P3=$381, P4=$410, Q1=17,000 and Q2=34,500. Suppose the government takes action to achieve economic efficiency. What is the economically efficient price? What price is received by producers? How much revenue does the government earn?
Please round your final answer to two decimal places.
◦ $381, $194, $3,179,000.00
◦ $223, $410, $6,451,500.00
◦ $410, $223, $7,693,500.00
◦ $194, $381, $3,298,000.00
Post by: Asfa on Nov 23, 2022
Because the marginal social cost (MSC) is greater than the marginal cost (MC), the graph shows a negative externality.
When there is a negative externality, the government can achieve economic efficiency by imposing a tax equal to the marginal external cost to society (or the vertical difference between the marginal social cost curve and the marginal cost curve).
Tax = P3 - P1 = 381 - 194 = $187
The economically efficient price occurs where the marginal social cost (MSC) equals demand (MB).
In this example, at price P3 = $381 and quantity Q1 = 17,000.
Producers, however, will not receive a price of $381 because they must pay the tax.
Producer receive = 381 - tax = 381 - 187 = $194.
Government revenue is equal to the tax times the economically efficient level of output.
Government revenue = tax * Q1 =187*17,000 = $3,179,000.00