Question

DIAGRAM FOR THIS QUESTION AT END OF THIS DOCUMENT! A small country's market for paper is described as follows: Demand: Q = 12-P P: S/ream of paper Supply: 08 =P 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 (i. or ii.) would result in the more efficient (less inefficient) outcome? [Calculate total social surplus under each case.] i. A S4 / rearn 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
solve the last three questions of the last image.

Answer 1

Blank 1) = CONSUMER surplus + producer surplus- external cost=1/2*8*(12-4)+1/2*4*4-4*4=32+8-16=24

Blank 2)= A+B+H+K+L+E+F

Blank 3)=I+G+C

IT WOULD CHOOSE free trade as the total surplus of with free trade is equal to area (A+B+H), while total surplus with free trade is equal to area( A+B+H+K+L+E+F) ,so higher total surplus make tax a better choice.

( A+B+H)=1/2*4*(12-4)=16

(A+B+H+E+F+K+L)=24

If both tax and free trade inacted

CONSUMER will buy only from world and domestic production equal to zero.so no external cost.

Total surplus=1/2*8*(12-4)=32

Total surplus=A+B+C+E+F+G+H+K+L

Externalities cost would be zero from this policy