When Domestic Production Causes Domestic Pollution
(Figure 12.4)

With no international trade (and no government policies limiting pollution), the paper market clears at a price of $1 per ream, with 2 billion reams produced and consumed per year. Press "Show P and Q without trade" to show the market clearing price and quantity before trade. Because there is no recognition in the market of the cost of the pollution, this is overproduction of paper. Consider the shift to free trade, with an international price of $1.10 per ream (and still no government policies limiting pollution). Domestic production expands to 2.3 billion reams, domestic consumption declines to 1.8 billion, and 0.5 billion reams are exported. Press "Show P and Q's with trade" to show the world price and the quantities produced domestically and consumed domestically on the graph.
Press "Continue" when you are ready to move on. The "Reset" button will clear the graph.