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Suppose that a wood pulp mill is situated on a bank of a river. The private marg...
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Suppose that a wood pulp mill is situated on a bank of a river. The private marginal cost (MC) of producing wood pulp (in $ per ton) is given by the function
MC = 15 + 2Y
where Y is tons of wood pulp produced. In addition to this private marginal cost, an external cost is incurred. Each ton of wood pulp produces pollutant flows into the river which cause damage valued at $15. This is an external cost, as it is borne by the wider community but not by the polluting firm itself. The marginal benefit (MB) to society of each ton of produced pulp, in $, is given by
MB = 45 − Y
What’s the result of private-optimal quantity minus socially efficient quantity?
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