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The market for cardboard is competitive and the equilibrium price of cardboard is $50 per ton. At this price, 10 units are traded.

1.The market for cardboard is competitive and the equilibrium price of cardboard is $50 per ton. At this price, 10 units are traded. However, the production of cardboard creates a negative externality because waste product is dumped into a nearby river. The external cost created by cardboard production is $20 per ton.

A) On a diagram show the market equilibrium in the cardboard market. Show the equilibrium level of trade, the socially optimal level of trade, and any deadweight loss.

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B) The government decides to place a $20 per ton tax on cardboard to “internalise the externality”. Show this on the diagram in Part A.

C) What happens to the deadweight loss after the tax is imposed? Explain your answer in 2 lines.

D) What alternatives could the government use to force this firm to internalise the negative externality? Provide one.

2. If your goal is to reduce congestion (but you cannot build any new infrastructure), what method would you recommend to make the most efficient use of your transportation system? Explain.

3. A government that wants to correct for a positive externality must find a way to subsidise the production or consumption that moves equilibrium to the social optimum. Is this statement true or false? Explain.

 

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