Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?
A)They are equal.
B)The after-tax equilibrium quantity is greater than the socially optimal quantity.
C)The after-tax equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

Imposing a $5 per-unit tax on the producers equal to the negative externality they create internalizes the externality. This means the after-tax equilibrium quantity will align with the socially optimal quantity, as the tax effectively adjusts the market outcome to account for the external costs.

Suppose That Electricity Producers Create a Negative Externality Equal to $5