Figure: Efficiency and Pollution (Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution.A Pigouvian tax of $10 will result in a quantity of pollution for which the:
A)marginal social benefit is less than the marginal social cost.
B)marginal social benefit exceeds the marginal social cost.
C)marginal social benefit equals the marginal social cost.
D)resources are allocated efficiently.

Question

Figure: Efficiency and Pollution   (Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution.A Pigouvian tax of $10 will result in a quantity of pollution for which the:
A)marginal social benefit is less than the marginal social cost. 
B)marginal social benefit exceeds the marginal social cost. 
C)marginal social benefit equals the marginal social cost. 
D)resources are allocated efficiently.

Quizplus · Accepted Answer

A Pigouvian tax is a type of tax placed on goods that have negative externalities, such as pollution. The purpose of the tax is to internalize the externality by making the producer pay for the social cost of the pollution. In this figure, when a $10 Pigouvian tax is placed on the producer, the marginal private cost (MPC) curve will shift up by $10 to become the marginal social cost (MSC) curve. The new equilibrium point will be where the MSC curve intersects the marginal social benefit (MSB) curve. As shown in the figure, this new equilibrium point results in a quantity of pollution for which the MSB is less than the MSC, indicating that the negative externality of pollution is being internalized and the resources are being allocated efficiently. Thus, the correct answer is A.