The following graph shows the demand (marginal private benefits, or MPB) and supply (marginal private costs, or MPC) curves for a good. Suppose that a negative externality arises as a result of the production of the good. In particular, the external costs equals $1 per unit of output. The purple line on the graph represents the marginal social costs (MSC) curve associated with this externality. A corrective tax of On the following graph, use the black point (plus symbol) to plot the socially optimal outcome. Suppose the government imposes a $3-per-unit tax on the production of the good. Use the green line (triangle symbol) to plot the new demand or supply curve as a result of the $3-per-unit tax on the production of the good. Then, use the grey point (star symbol) to plot the price and quantity combination with the tax. PRICE AND COST (Dollars per unit) 10 9 8 1 $1 per unit would result in socially optimal outcome. 0 0 10 20 +43 60 30 40 50 QUANTITY (Units) MSC D (MPB) S (MPC) 70 80 90 100 Socially Optimal Outcome New Demand (MPB) or Supply (MPC) with $3 Tax Outcome with Tax of $3 A $3-per-unit tax on the production of the good would lead to an output that is less than (?) the socially optimal output.
The following graph shows the demand (marginal private benefits, or MPB) and supply (marginal private costs, or MPC) curves for a good. Suppose that a negative externality arises as a result of the production of the good. In particular, the external costs equals $1 per unit of output. The purple line on the graph represents the marginal social costs (MSC) curve associated with this externality. A corrective tax of On the following graph, use the black point (plus symbol) to plot the socially optimal outcome. Suppose the government imposes a $3-per-unit tax on the production of the good. Use the green line (triangle symbol) to plot the new demand or supply curve as a result of the $3-per-unit tax on the production of the good. Then, use the grey point (star symbol) to plot the price and quantity combination with the tax. PRICE AND COST (Dollars per unit) 10 9 8 1 $1 per unit would result in socially optimal outcome. 0 0 10 20 +43 60 30 40 50 QUANTITY (Units) MSC D (MPB) S (MPC) 70 80 90 100 Socially Optimal Outcome New Demand (MPB) or Supply (MPC) with $3 Tax Outcome with Tax of $3 A $3-per-unit tax on the production of the good would lead to an output that is less than (?) the socially optimal output.
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter30: Market Failure: Externalities, Public Goods, And Asymmetric Information
Section: Chapter Questions
Problem 10QP
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Transcribed Image Text:The following graph shows the demand (marginal private benefits, or MPB) and supply (marginal private costs, or MPC) curves for a good. Suppose
that a negative externality arises as a result of the production of the good. In particular, the external costs equals $1 per unit of output. The purple
line on the graph represents the marginal social costs (MSC) curve associated with this externality.
A corrective tax of
On the following graph, use the black point (plus symbol) to plot the socially optimal outcome.
Suppose the government imposes a $3-per-unit tax on the production of the good.
Use the green line (triangle symbol) to plot the new demand or supply curve as a result of the $3-per-unit tax on the production of the good. Then,
use the grey point (star symbol) to plot the price and quantity combination with the tax.
PRICE AND COST (Dollars per unit)
10
9
8
$1 per unit would result in socially optimal outcome.
0
0
10 20
30
60
40
QUANTITY (Units)
50
+
70
MSC
D (MPB)
S (MPC)
80 90 100
Socially Optimal Outcome
New Demand (MPB) or Supply (MPC) with $3 Tax
A $3-per-unit tax on the production of the good would lead to an output that is
Outcome with Tax of $3
less than
the socially optimal output.
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