(Figure: MSB and MSC of Pollution) The figure MSB and MSC of Pollution shows the marginal social cost and marginal social benefit of pollution.Suppose pollution is unregulated.What is the level of an emissions tax that would move the level of pollution to the socially optimal level?
A)$100
B)$800
C)$500
D)$300

Question

Quizplus · Accepted Answer

The socially optimal level of pollution occurs where MSB=MSC, which is at a pollution level of 2.5 units. To reach this level, a tax must be imposed to internalize the externalities of pollution. The emissions tax that would achieve this level can be determined by finding the difference between the marginal social cost at the socially optimal level and the marginal private cost at the unregulated level:

($7,500 - $3,000) = $4,500

Therefore, the emissions tax should be set at $4,500 per unit of pollution, which is equal to a total tax of $4,500 * 2.5 units = $11,250.

The closest option to this value is option C, $500 per unit of pollution, which would result in a tax of $500 * 2.5 = $1,250. This tax would incentivize polluters to reduce their emissions to the socially optimal level.

(Figure: MSB and MSC of Pollution) the Figure MSB and MSC