Suppose that at present there are no laws to restrict pollution produced by the widget industry.Assume that the supply and demand curves are linear and that the market price of a widget is $20.If the government imposes a tax equal in value to the cost of the pollution,then firms would continue to produce widgets if
A)the cost imposed by the pollution is less than $20 per widget produced.
B)the private cost of producing a widget equals the cost of the pollution generated per widget.
C)$20 minus the private cost of producing a widget is greater than the cost of the pollution generated per widget.
D)$20 minus the private cost of producing a widget is less than the cost of the pollution generated per widget.

Question

Quizplus · Accepted Answer

If the government imposes a tax equal in value to the cost of the pollution, then the private cost of producing a widget will equal the social cost (private cost + cost of the pollution). Therefore, firms will continue to produce widgets if the private benefit of producing a widget (which is $20 in this case since that is the market price) minus the private cost of producing a widget is greater than the cost of the pollution generated per widget. This can be written as:
$20 - private cost > cost of pollution
This is true for choice C.

Suppose That at Present There Are No Laws to Restrict