Question

Producing paper creates pollution. There is no externality in the consumption of paper. The efficient quantity of paper produced occurs when the

A) marginal social benefit from paper is equal to zero.
B) marginal social cost of the pollution from making paper is equal to zero.
C) marginal private cost of the pollution from making paper is equal to zero.
D) marginal private cost of paper equals the marginal private benefit from paper.
E) marginal social benefit from paper is equal to the marginal social cost of paper.

Answer 1

The efficient quantity of paper aligns when marginal social benefit equals marginal social cost, factoring in pollution as a negative externality that results in a market failure.

Step-by-step explanation:

The efficient quantity of paper is produced when the marginal social benefit from paper is equal to the marginal social cost of paper. When producing paper, pollution creates a negative externality, which means that the production imposes additional costs on society that are not reflected in the private costs of production. This leads to a market failure, as the private market does not account for these social costs, and consequently, too much paper is produced relative to the socially efficient level.

Recognizing and addressing externalities, such as pollution from manufacturing paper, can involve government interventions like taxation. By taxing polluting activities, firms are encouraged to reduce production to the socially optimal level where the social costs, including environmental damage, align with the social benefits of consuming paper.