Question

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment.

If the government intervenes and corrects the externality in the situation described above, we would expect:

The demand for the output from the hydroelectric power plants to decrease

The supply of the output from the hydroelectric power plants to decrease

The demand for the output from the hydroelectric power plants to increase

The supply of the output from the hydroelectric power plants to increase

Answer 1

Option 4.

The supply of the output from the hydroelectric power plants to increase

Explanation: The waste product is a negative externality imposed on the hydroelectric power-generating plants. The cost of the hydroelectric power-generating plants increases because of the waste products. Therefore, because of the higher costs, the hydroelectric power-generating plants tend to produce less than the socially optimal quantity. The government intervention can reduce the costs of the hydroelectric power-generating plants and increase the quantity produced. So, government intervention would help the supply of the output from the hydroelectric power plants to increase.