Figure: The Optimal Quantity of Pollution (Figure: The Optimal Quantity of Pollution) The figure The Optimal Quantity of Pollution shows the marginal social cost (MSC) and marginal social benefit (MSB) for firms that pollute the air with sulfur dioxide.Using the figure, the optimal Pigouvian tax per unit of pollution is:
A)$500.
B)$250.
C)$167.
D)$83.

Question

Figure: The Optimal Quantity of Pollution   (Figure: The Optimal Quantity of Pollution) The figure The Optimal Quantity of Pollution shows the marginal social cost (MSC) and marginal social benefit (MSB) for firms that pollute the air with sulfur dioxide.Using the figure, the optimal Pigouvian tax per unit of pollution is:
A)$500. 
B)$250. 
C)$167. 
D)$83.

Quizplus · Accepted Answer

The optimal Pigouvian tax per unit of pollution is equal to the difference between the MSC and the MSB at the socially optimal level of pollution. From the figure, we see that the socially optimal level of pollution occurs where the MSC and MSB curves intersect, which is at a quantity of 10 units of pollution. At this quantity, the MSC is $400 and the MSB is $567, so the optimal Pigouvian tax per unit of pollution is $167 (i.e. $567 - $400 = $167). Therefore, the correct choice is C.

Figure: the Optimal Quantity of Pollution (Figure: the Optimal