Question

Suppose that government officials have set an emissions tax to reduce pollution. Assume that the optimal tax would be $1,500, but government officials have set the tax at $500. At the equilibrium with the $500 tax:

	a.	there will be too much pollution.
	b.	the marginal social cost of pollution will be less than $500.
	c.	the marginal social benefit of pollution will be less than $500.
	d.	the marginal social benefit of pollution will be more than $500.

Answer 1

a. there will be too much pollution.

​​​​​​When the tax set by government is less than the optimal tax, the quantity produced in the market is higher than the socially optimal level of quantity.

Socially optimal quantity is produced in the market if the tax levied is equal to the optimal tax. When tax less than the optimal tax rate, the market outcome leads to over production. Over production means that more pollution is emitted than the optimal level. This leads to too much pollution.

Therefore, the correct answer is a.