b. Explain why the marginal benefit of pollution reduction
falls as the cleanliness of the water increases. Plot the
curve in the same diagram.
c. What is the optimal level of water cleanliness?
d. Explain why the efficient level of pollution is greater than
zero.
12. Consider the market for lumber, which we assume here to be
perfectly competitive.
a. Suppose that for each unit of lumber produced, the firms
also generate $10 of damage to the environment. Draw
the social marginal cost curve in the diagram.
b. Show the allocatively efficient level of lumber output on
the diagram. Explain.
c. Describe and show the new market outcome if lumber
producers are required to pay a tax of $10 per unit of
lumber produced. Explain.
d. In part (c), does the equilibrium price of lumber rise by
the full $10 of the tax? Explain.
