Question

The paper industry is the major industrial source of water pollution. The inverse demand curve for the paper market (which is also the marginal benefit curve) is P = 450 - 2Q where Q is the quantity consumed when the price consumers pay is P. The inverse supply curve (also the marginal private cost curve) for refining is MPC = 30 + 2Q. The marginal external cost is MEC = Q where MEC is the marginal external cost when the industry releases Q units of waste.

e) Suppose the government imposes an emissions fee of $T per unit of pollution. How large should the emissions fee be if the market is to produce the economically efficient amount of paper?

Answer 1