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Suppose that the only way to reduce pollution from paper production is to reduce paper output. To this end, the government imposes a tax on
Suppose that the only way to reduce pollution from paper production is to reduce paper output. To this end, the government imposes a tax on the monopoly paper producer. Graphically illustrate (on two separate graphs) each of the following two scenarios: 1) The tax raises welfare; 2) The tax lowers welfare. In both scenarios, assume the amount of the tax is the same. How does this relate to the Theory of the Second Best?
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