The production of paper creates pollution, an external cost. What ...

[Marty]

The production of paper creates pollution, an external cost. What happens to the production of paper if the government imposes a tax on paper producers equal to the marginal external cost of the pollution?
 
  What will be an ideal response?

Question 2

A business entity that produces goods or services is referred to as a(n):
 
  A) market.
  B) firm.
  C) government.
  D) industry.

[mtmmmmmk]

Answer to Question 1

When the government imposes a tax equal to the marginal external cost of the pollution, the production of paper decreases. Prior to the tax being imposed, the external cost was ignored by the producers because they did not pay this cost. However, once the tax is in place, the external cost now becomes a cost that the producer must pay. As a result, the producers' costs increase and so the supply of paper decreases.

Answer to Question 2

B