Use the following information to answer the question below.

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment.

If the government intervenes and corrects the externality in the situation described above, we would expectA. the output of the paper mills to increase.B. the price of paper from the mills to decrease.C. production of the hydroelectric power plants to decrease.D. production in the paper mills to decrease.

Explanation: The Government intervening means that it will tend to impose a high tax on the company to solve the externality ie to clean up the river's water

With increase in tax to solve this externality, it will have a negative effect on the equilibrium price for the paper mill which is the price at which the Paper mill supply matches its consumer demand at a stable price. If sales tax increases for the paper mills company, it will cause increase in the the price of paper, thereby causing the equilibrium price to fall, which means that it becomes more difficult for Paper mill to profit from selling goods, or its consumers may change their buying behavior to go for a lesser price else where, making the production at the mills to reduce.

ANSWER --Dproduction in the paper mills to decrease.