1. (negative, positiveexternality 2. (impose a tax, grant a subsidy) 3. (greater
ID: 1115760 • Letter: 1
Question
1. (negative, positiveexternality
2. (impose a tax, grant a subsidy)
3. (greater than, equal to, less than) the amount of
4. (spillover benefits, spillover costs)
5. {demand(provate value), supply(private caost), social value, social cost)
6. (right, left)
A paper mill releases emissions that reduce local air quality. The following graph shows the demand (private value), the supply (private cost), and the social cost resulting from the paper production. The spillover effect associated with the air pollution from the paper mill's emissions would be classified as a externality. To achieve efficiency in the presence of such an externality, the government can the amount of , on the paper mill for each ream of paper , resulting in a produced. Such a policy would shift the market equilibrium quantity that is closer to the socially optimal equilibrium quantity. of paper production to the On the graph, shift one or more curves to show how a government policy (tax or subsidy) would improve efficiency in this market.Explanation / Answer
Ans:
1. Negative externality
2. impose a tax
3. greater than
4. spillover benefits
5. supply(private cost)
6. left
The spillover is causing air pollution which is negative externality. In order to reduce it to socially optimal equilibrium quantity government should impose tax so that the benefits of spillover is eliminated and spillover is discouraged resulting in reduction in spillover to socially optimal equilibrium quantity.
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