Suppose that a paper mill is located on a river. Making paper also produces waste, which runs off into the river and pollutes the downstream area. The people who live in the downstream area are not consumers of the paper that the plant produces. The production of paper involves an external cost of $2 per ream of paper produced. If neither the firm nor consumers include the external cost in their consumption or production decisions, the resulting equilibrium will involve overproduction of paper, relative to the quantity that would maximize social surplus. One way to correct the negative externality would be to impose a tax on consumers. If the tax is imposed on consumers, demand will decrease , which will cause market price to and quantity to . Alternatively, the government could impose a tax on producers. If the tax is imposed on producers, supply will decrease , which will cause market price to and quantity to decrease . Assuming that the tax is identical in either case and is equal to the external cost, which of the following statements is not true?
a. The externality will be Internalized In elther case
b. The new market quality will be socially optimal In elther case
c. The effect on market price will be the same in either case.
d. Both producers and consumers will be worse off In elther case.
e. The effect on market quantity will be the same In elther case