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 above, we would expect:
A) The output of the paper mills to increase
B) The price of paper from the mills to decrease
C) Production of the hydroelectric power plants to decrease
D) Production in the paper mills to decrease

Question

Quizplus · Accepted Answer

If the government intervenes and corrects the externality by implementing measures to prevent the paper mills from discharging waste products into the river, the production in the paper mills would decrease. This is because they would have to incur additional costs to properly dispose of their waste products, which would reduce their profit margin. Thus, the output of the paper mills would not increase, nor would the price of paper from the mills decrease. The production of the hydroelectric power plants would not be directly affected by the government intervention.

It Is the Custom for Paper Mills Located Alongside the Layzee