Negative Production Externality Question:
A saw mill dumps 1 gallon of effluent into a lake for every
1,000 pounds of lumber it produces. Each gallon of effluent dumped
into the lake cuases enviornmental damage equal to $100. Assume
that demand is perfectly elastic and that the price of a
1,000-pound pallet of lumber is $750. Marginal costs of production
per pallet of lumber to the firm are MC = 50 + 0.2q.
1. What are the market and socially optimal production levels of
lumber and the amount that lumber production must be reduced to
reach the socially optimal level?
2. Calculate the amount of social loss that society would have
as a result of ignoring this externality.