Question

1a). Under what economic/market condition(s) can a government impose per unit tax on a product and increase economic efficiency, i.e., reduce deadweight loss?
1b). Under the economic/market condition(s) that you have described above, how does the per unit tax on a product increase economic efficiency, i.e., reduce deadweight loss?

Answer 1

a) If the product that is having more social cost and the social benefit form that good is less, for example, an industry that is creating a pollution and harmful for the area where they are operating. AN increase in the tax will reduce the deadweight loss in that market.

b) Per unit tax in the economic product will reduce the output that the firm is producing and reduce the pollution they are causing. it will reduce the marginal cost and make it equal to the marginal benefit. Eliminating the dead weight loss.