It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river
ﬁnd that they must clean up the river's water before it ﬂows through their equipment.
If the government intervenes and corrects the externality in the situation described, we would
Expect
A) the supply of the output from the hydroelectric power plants to decrease.
B) the supply of the output from the hydroelectric power plants to increase.
C) the demand for the output from the hydroelectric power plants to decrease.
D) the demand for the output from the hydroelectric power plants to increase.

Question

Quizplus · Accepted Answer

If the government intervenes and corrects the externality by enforcing environmental regulations, paper mills will have to find alternative ways to dispose of their waste products, such as treating them before discharge or finding alternative disposal methods. This will increase their costs of production, leading to a decrease in the supply of their output. However, the hydroelectric power-generating plants downstream will benefit from the cleaner water, which will reduce their costs of production by decreasing the need for cleanup before the water flows through their equipment. This will lead to an increase in the supply of their output. Therefore, the correct answer is B, as the supply of the output from the hydroelectric power plants will increase.

It Is the Custom for Paper Mills Located Alongside the Layzee