Question

The production of paper involves an external cost of $2 per ream of paper produced. If neither the firm nor consumers include the external cost in their consumption or production decisions, which of the following is true about the resulting equilibrium, relative to the quantity that would maximize social surplus?

A. The quantity will be socially optimal. B. The quantity might be too high or too low, depending on demand. C. The quantity will be too high. D. The quantity will be too low. Reset Selection Question 4 of 8 1.0 Points One way to correct the negative externality would be to impose _______(Blank #1)_______, which would cause the market quantity to _____(Blank #2)_____.

Blank #1: A. a tax of more than $2 per ream of paper produced

B. a tax of less than $2 per ream of paper produced

C. a tax of $2 per ream of paper produced

D. a subsidy of $2 per ream of paper produced Reset Selection

Question 5 of 8 1.0 Points One way to correct the negative externality would be to impose _______(Blank #1)_______, which would cause the market quantity to _____(Blank #2)_____. Blank #2: A. decrease

B. stay the same

C. increase

Answer 1

Answer : 3) C) Quantity will be too high , because marginal social benefit is less than cost , so output is higher than socially optimal level of output .

4) C) a tax of $2 per ream of paper . When $2 imposed as a tax , it increase private cost which result is rise in price which ultimately decrease demand and MSB=MSC , optimal output will be produced.

5) A ) decrease . When tax imposed , price and cost rise so output is decrease to a social optimal level .