Question

Choose the correct statement.

Select one:

a.  In a commodity market with positive externalities, where the firm is producing below the socially efficient level, an introduction of a commodity tax reduces the marginal deadweight-loss

b.
In a commodity market with positive externalities, where the firm is producing below the socially efficient level, an introduction of a commodity tax reduces the deadweight-loss

c.  In a commodity market with negative externalities, where the firm is producing above the socially efficient level, an introduction of a commodity tax increases the deadweight-loss

d. In a commodity market with negative externalities, where the firm is producing above the socially efficient level, an introduction of a commodity tax reduces the marginal deadweight-loss

Answer 1

Answer: c) In a commodity market with negative externalities, where the firm is producing above the socially efficient level, an introduction of a commodity tax increases the deadweight-loss.

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Negative production externalities occur when the production process results in a harmful effect on unrelated third parties. For example, manufacturing plants cause noise and atmospheric pollution during the manufacturing process. One of the solutions to negative externalities is to impose taxes to change people’s behavior. The taxes can be imposed to reduce the harmful effects of certain externalities such as air pollution, smoking, and drinking alcohol. The tax equals the cost of the externality, and it is imposed with the goal of discouraging activities that cause such harmful effects. Thus, reducing the DWL.