A paper mill has leaked a toxic substance (chlorine) into the ground. Fixing the leak was very expensive so the paper mill chose not to fix the leak. Once local residents and local government discovered that the toxic was contaminating local water supplies, though,the factory agreed to fix the leak.

a) Draw a supply and demand curve for the output (paper) produced by the paper mill before the local water contamination was discovered, i.e. residents do not know about the leaking. Use this graph as the initial market status.

b) How will the supply curve be affected by the decision to fix the leak? Add a new supply curve to your initial diagram to reflect this change. What will happen to the equilibrium price and quantity?

Note: since the leak is fixed, the water quality is good. the demand on the water is not affected. We focus on the supply side here.

c) How will the buyers of paper from the factory who live far away from the contamination be affected by the decision to fix the leak? are they happy?