Question

Quantity	Private Value	Private Cost	Social Cost
100	$2000	$500	$800
200	$1800	$600	$900
300	$1600	$700	$1000
400	$1400	$800	$1100
500	$1200	$900	$1200
600	$1000	$1000	$1300
700	$800	$1100	$1400
800	$600	$1200	$1500
900	$400	$1300	$1600

How large would the per-unit tax on paper need to be, in order to induce the paper factory to produce the socially optimal level of paper? (Hint: Table shows value and costs per 100 units and questions asks for tax for 1 unit.)

(Write answer without the dollar sign.)

I got 300 but was wrong. Please help!

Answer 1

The diagram below we have drawn the private value function as well as the private cost function. The social cost function is also drawn which lies above the private cost function. At every unit social cost is greater than private cost.

We can see that the difference between the two cost is $300 for 100 unit or $3 per unit. Therefore the appropriate tax is $3 per unit which should be charged from the firm.

The Per unit tax is $3