Figure 4-18
Suppose there are several paper mills producing paper for a market. These mills, located upstream from a fishing village, discharge a large amount of wastewater into the river. The waste material affects the number of fish in the river and the use of the river for recreation and as a public water supply source. Figure 4-18 shows the paper market. Use this Figure to answer the following question(s).
-Refer to Figure 4-18.Why is there a deadweight loss?
A) because the marginal social cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit
B) because the marginal private cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit
C) because the marginal social benefit of producing each additional unit in excess of Q₂ exceeds the private cost
D) because the marginal private benefit of producing each additional unit in excess of Q₂ exceeds the social cost

Question

Figure 4-18
  Suppose there are several paper mills producing paper for a market. These mills, located upstream from a fishing village, discharge a large amount of wastewater into the river. The waste material affects the number of fish in the river and the use of the river for recreation and as a public water supply source. Figure 4-18 shows the paper market. Use this Figure to answer the following question(s).
-Refer to Figure 4-18.Why is there a deadweight loss?
A) because the marginal social cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit 
B) because the marginal private cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit 
C) because the marginal social benefit of producing each additional unit in excess of Q₂ exceeds the private cost 
D) because the marginal private benefit of producing each additional unit in excess of Q₂ exceeds the social cost

Quizplus · Accepted Answer

There is a deadweight loss because at the market equilibrium quantity Q*, the marginal social cost (MSC) is greater than the marginal social benefit (MSB). This means that the negative externalities (waste material affecting fish population, recreational use, and public water supply) are not accounted for in the market price, leading to overproduction and an inefficient allocation of resources. As a result, there is a deadweight loss equal to the shaded area between the MSC curve and the demand curve, from Q₂ to Q*.

Figure 4-18 Suppose There Are Several Paper Mills Producing Paper