The paper industry is the major industrial source of water pollution. The inverse demand curve for...

The paper industry is the major industrial source of water pollution. The inverse demand curve for the paper market (which is also the marginal benefit curve) is P = 450 - 2Q where Q is the quantity consumed when the price consumers pay is P. The inverse supply curve (also the marginal private cost curve) for refining is MPC = 30 + 2Q. The marginal external cost is MEC = Q where MEC is the marginal external cost when the industry releases Q units of waste.

a) Suppose the government imposes an emissions fee of $T per unit of pollution. How large should the emissions fee be if the market is to produce the economically efficient amount of paper?

b) Using the information above explain why a ban on paper production may not be a good policy to address the water pollution.

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