Negative Externality

The following questions refer to the accompanying diagram, which shows the effects of a negative externality created by an industry's production. The equilibrium quantity in the absence of any attempt to internalize the externality is QE, and the optimal quantity according to a Pigovian analysis is QO.

-Refer to Negative Externality.According to a Pigovian analysis of this externality,when a tax of $5 per unit is imposed on the firms in this industry,the external costs created by the firms' production will equal
A) area C + D + E + G + H.
B) area C + D + G + H.
C) area C + G.
D) zero.

Question

Negative Externality

The following questions refer to the accompanying diagram, which shows the effects of a negative externality created by an industry's production. The equilibrium quantity in the absence of any attempt to internalize the externality is QE, and the optimal quantity according to a Pigovian analysis is QO.

-Refer to Negative Externality.According to a Pigovian analysis of this externality,when a tax of $5 per unit is imposed on the firms in this industry,the external costs created by the firms' production will equal
A) area C + D + E + G + H. 
B) area C + D + G + H. 
C) area C + G. 
D) zero.

Quizplus · Accepted Answer

A Pigovian tax is designed to equal the external cost of production, thus internalizing the externality. When the tax is set correctly, the external costs are offset, making the net external cost zero.

Negative Externality The Following Questions Refer to the Accompanying Diagram, Which Shows