Question

Suppose the graph to the right illustrates the market for toilet paper. Let the production of toilet paper create pollution​ (a negative​ externality) such that the marginal social cost of toilet paper production is ​$150 more than the marginal private cost.

​1.) Using the line drawing​ tool, graph the marginal social cost curve. Label this line ​'S2​'.
​2.) Using the point drawing​ tool, identify the efficient market price and quantity. Label this point ​'e2​'.
​3.) Using the triangle drawing​ tool, shade in the deadweight loss created by this externality. Label this​ 'DWL'.
Carefully follow the instructions​ above, and only draw the required objects.

Answer 1

To graph the market for toilet paper with a negative externality, plot the marginal social cost curve, identify the efficient market price and quantity, and shade in the deadweight loss created by the externality.

Step-by-step explanation:

To graph the market for toilet paper in the presence of a negative externality, we need to plot the marginal social cost curve. The marginal social cost (MSC) is $150 more than the marginal private cost (MPC). So, we will start with the MPC curve and shift it upward by $150 to indicate the MSC curve. This curve is labeled as 'S2' on the graph.

Next, we need to identify the efficient market price and quantity, which represent the socially optimal output. This occurs where the MSC curve intersects the demand curve. We label this point as 'e2'.

To show the deadweight loss created by the externality, we shade the area between the MSC curve and the demand curve from the efficient quantity to the market quantity. This shaded area represents the inefficiency or deadweight loss (DWL) caused by the externality.