Question

Suppose that electricity producers create a negative externality equal to $10 per unit further suppose that the government imposes a $8 per unit tax on the producers what is the relationship the after-tax equilibrium quantity in the socially optimal quantity of electricity to be produced

A) They are equal

B) the after-tax equilibrium quantity is greater than the socially optimal quantity

C) the after-tax equilibrium quantity is less than the socially optimal quantity

D) there is not enough information to answer his question

Answer 1

The externality creates a social cost. This moves the socially optimal curve to the left by amount equal to $10 per unit. The equilibrium quantity is more than the socially optimal quantity. When a tax is imposed, the supply curve shifts to the left, but it is still producing more than the socially optimal level because tax is less than the negative externality.

Hence the correct option is

B) the after-tax equilibrium quantity is greater than the socially optimal quantity.

answered by: anonymous