Question

1. Suppose that the paper industry emits wastes into rivers and streams when producing paper. Municipalities or firms downstream must treat the water to make it useable. Do the paper industry’s private costs equal the social costs of producing paper? Explain your answer.

2. Suppose that production of any amount of paper results in pollution that costs municipalities and firms downstream $200. A law is passed that requires the paper companies to reimburse the municipalities and firms downstream for these costs so that the producers must pay a tax of $200 per ton of paper. Prior to the law, the supply schedule for paper was:

Price of paper (dollars per ton)	Quantity supplied (millions of tons of paper per year)
100	10
200	15
300	20
400	25
500	30

a. After the law takes effect, what is the quantity supplied at each price?

Suppose that the demand schedule for paper is in the table below:

Price of paper (dollars per ton)	Quantity demanded (millions of tons of paper per year)
100	30
200	25
300	20
400	15
500	10

b. Before the law takes effect, what is the equilibrium quantity of paper?
c. After the law takes effect, what is the equilibrium quantity of paper?
d. Which output—the one prevailing before the law or the one after the law—is more efficient? Why?

Answer the following multiple choice questions.

3. According to the Coase Theorem, private transactions are efficient

a. only if property rights are assigned to the person who is being harmed by an external cost.
b. only if property rights are assigned to the person who is causing harm by generating an external cost.
c. if property rights are assigned either to the person who is causing harm by generating an external cost, or to the person who is being harmed by an external cost.
d. if property rights are eliminated wherever an external cost or benefit appears.

4. If the marginal social benefit of a good equals the marginal private benefit of the good, then the marginal external benefit of the good

a. is zero.
b. equals the marginal social benefit.
c. equals the marginal social cost.
d. equals the marginal private cost.

5. Measles vaccination has an external benefit. The efficient amount of measles vaccine is produced and consumed when the
a. marginal social benefit of vaccination is equal to the marginal social cost of vaccination.
b. marginal social benefit of vaccination exceeds marginal social cost of vaccination by as much as possible.
c. marginal social benefit of vaccination is less than marginal social cost of vaccination.
d. None of the above because efficiency has to do with property rights and has nothing to do with the marginal social benefit of vaccination or the marginal social cost of vaccination.

Answer 1

Question 1:

The paper industry's private cost does not equal the social cost because private cost includes just the cost of inputs used in making the paper but not the cost of damage done to the environment by polluting the river. Thus, social cost = private cost + Cost of treating the water.

a.

Price of paper (dollars per ton)	Quantity supplied (millions of tons of paper per year)
100 + 200 = 300	10
200+200 = 400	15
300+200 = 500	20
400+200 = 600	25
500+200 = 700	30

After the law, price increased by $200 at each level of quantity supplied.

b. Before the law, equilibrium occurs where private cost = demand. So, equilibrium quantity is 20 million tons as equilibrium occurs at $300 where Qd = Qs = 20 million.

c. After the law, equilibrium occurs where social cost = demand. So, equilibrium quantity is 15 million tons as equilibrium occurs at $400 where Qd = Qs = 15 million.

d. The one after the law is more efficient as it involves the social cost of producing the paper. So, it will maximize the total surplus.

Question 2: c. if property rights are assigned either to the person who is causing harm by generating an external cost, or to the person who is being harmed by an external cost.
(Coase theorem does not states who should be assigned the property rights but they should exist.)

Question 4: a. is zero.
(When MSB = MPB then MEB = 0)

Question 5: a. marginal social benefit of vaccination is equal to the marginal social cost of vaccination.
(Efficient amount is that where MSB = MSC.)