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1)Why does a tax on a product that has a negative externality help get the market closer to the social optimum?How does the tax change the behavior of the consumer or producer?

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Ronald
RonaldLv2
28 Sep 2019

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Related questions

If the social cost of producing a good or service exceeds the private cost

A. a negative externality exists.

B. the market achieves economic efficiency.

C. the sum of consumer surplus and producer surplus is maximized.

D. a positive externality exists.

If the social cost of producing a good or service exceeds the private cost
Ā 
A. A negative externality exists.
B. The market achiever's economic efficiency.
C. The sum of consumer surplus and producer surplus is maximized.
D. A positive externality exists.

The market demand for gadgets is given by Qd=100-3p, where Qd is the quantity of gadgets demanded and p is the price of a gadget in dollars. The market supply is given byQs= p, where Qs is the quantity of gadgets supplied. The production of gadgets releases a toxic effluent into the water supply. The marginal external cost can be described by MEC(Q)= 2Q.

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b) Compute consumer surplus, producer surplus, and the cost of pollution at the social optimum.

c) Suppose the government is considering imposing a tax of $T per unit on the producers. Find the level of the tax that ensures the socially optimal amount of gadgets will be produced in a competitive equilibrium.

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