Question

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment.

If the government intervenes and corrects the externality in the situation described above, we would expect

Select one:

A. the price of paper from the mills to decrease.

B. production in the paper mills to decrease.

Answer 1

If the government intervenes and corrects the externality in the situation described above, we would expect

B. production in the paper mills to decrease.

If the government intervenes to correct the externality in the situation ( which is the discharging of the waste products by the paper mills into the river), we can expect the government to levy some sort of tax on the paper mills or limit the amount of waste disharged by the limiting production of paper.. In both the types of intervention scenarios, the paper production will decrease. If some sort of tax is levied on the paper mills, it will increase the cost of production for the paper mills, which will push some of the most inefficient mills out of business, leading to a drop in paper production. If the government limits the discharge of waste by limiting production, it automatically reduces the production of paper in the paper mills.

Option A is wrong since the price of paper is now likely to increase since there has been a drop in the amount of paper production.