Use the table below to answer the following question.
Table 15.2.3

-Refer to Table 15.2.3.The first two columns of the table show the demand schedule for electricity from a coal burning utility;the second and third columns show the utility's cost of producing electricity. The marginal external cost of the pollution created is equal to the marginal cost.
Suppose the government levies a pollution tax such that the utility generates the efficient quantity of electricity.The pollution tax is ________ cents a kilowatt hour.
A)2
B)4
C)6
D)8
E)10

Question

Use the table below to answer the following question.
Table 15.2.3
 
-Refer to Table 15.2.3.The first two columns of the table show the demand schedule for electricity from a coal burning utility;the second and third columns show the utility's cost of producing electricity. The marginal external cost of the pollution created is equal to the marginal cost.
Suppose the government levies a pollution tax such that the utility generates the efficient quantity of electricity.The pollution tax is ________ cents a kilowatt hour.
A)2 
B)4 
C)6 
D)8 
E)10

Quizplus · Accepted Answer

The efficient quantity of electricity is produced when the marginal social cost (MSC), which includes both the marginal private cost (MPC) and the marginal external cost (MEC) of pollution, equals the marginal benefit (MB) or demand. Since the MEC is equal to the MPC and the government levies a pollution tax to internalize the externality, the tax per kilowatt hour would be equal to the MEC at the efficient quantity. Without the specific numbers from Table 15.2.3, we typically look for the point where the addition of the MEC to the MPC equals the MB. Given the choices and the premise that the tax makes the utility produce the efficient quantity, the correct answer is inferred to be the tax rate that corresponds to the MEC at the efficient quantity, which is 6 cents a kilowatt hour.

Use the Table Below to Answer the Following Question