Assuming that paper is sold in competitive market

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Reference no: EM131241022

The supply of paper is described by the following equation Qs = 5,000P where Qs is tons supplied per year and P is the price per ton. The demand for paper is given by Qd = 400,000 – 3,000P Production of paper generates an externality of $20 per ton produced.

a. Assuming that paper is sold in a competitive market, what is the equilibrium price? How many tons of paper will be produced?

b. How does the socially efficient annual output of paper compare to the equilibrium amount? (Is it higher, lower, or the same?) Explain your answer using a graph.

c. Suppose the government wanted to levy a tax to get producers to sell the socially efficient amount of paper. How large should the tax be?

Reference no: EM131241022

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