The graph illustrates the unregulated market for pulp and pa

The graph illustrates the unregulated market for pulp and paper. The mills dump their waste in a river that runs through a small town. The marginal external cost of the dumped waste is equal to the marginal private cost of producing the pulp and paper (that is, the marginal social cost of producing the pulp and paper is double the marginal private cost).

Solution

The quantity of pulp and paper produced is where D=S(MPC)

that is 150 units.

Mill should pay marginal external cost to residents at Q=150

Marginal private cost(MPC) at Q=150 is 300

Marginal external cost =2 MPC

Marginal external cost =2(300)=600

Mill should pay 600 to residents to produce Q=150