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The supply of paper is described by the following equation: Qs = 5,000P where Qs is tons supplied per year and P is the price per ton.
The demand is described by
QD = 400, 000 - 1,000P
where QD is tons demanded per year.
Because of the pollution associated with paper production, marginal external costs of $20 are associated with each ton of paper.
Problem a. Assuming that paper is sold in a competitive market, what is the market price?
Problem b. How many tons of paper will be produced per year at that price?
Problem c. What is the efficient annual output of paper?
Problem d. How can a corrective tax achieve efficiency?
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