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 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 implementing regulations to prevent the paper mills from discharging waste products into the river, the quality of the water downstream will improve. As a result, the cost of cleaning up the water before it flows through the equipment of the hydroelectric power plants will decrease. This will make it easier and cheaper for the hydroelectric power plants to produce electricity, which will increase the supply of the output from the hydroelectric power plants. Therefore, the correct choice is B.

It Is the Custom for Paper Mills Located Alongside the Layzee