Reference no: EM132396877

A small country's market for paper is described as follows:

Demand: QD = 12 - P

Supply: QS = P

P: $ / ream of paper

Q: reams of paper

The country is currently closed and does not trade with the rest of the world.

It is well known that the production of paper in our small country increases toxic chemical levels in the country's rivers and streams. If these externality costs are estimated to be $4 / ream of paper, which policy would result in the more efficient (less inefficient) outcome? [Calculate total social surplus under each case]

i. A $4 / ream tax on domestic paper production while remaining closed to free trade in paper

ii. No tax on domestic paper production, but allowing free trade in paper with a world price of $4 / ream of paper

ii. No tax on domestic paper production, but allowing free trade in paper with a world price of $4 / ream of paper

If the tax is repealed and free trade IS allowed, total social surplus would be: