The supply of paper is described by the following equation:
Qs = 5,000P
where Qs is tons supplied per year and P is the price per ton. The demand is described by
QD = 400,000 – 1,000P
where QD is tons demanded per year. Because of the pollution associated with paper production, marginal external costs of $20 are associated with each ton of paper. Assuming that paper is sold in a competitive market, what is the market price? How many tons of paper will be produced per year at that price? What is the efficient annual output of paper? How can a corrective tax achieve efficiency?