Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government imposes a $6 per-unit tax on the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
A)They are equal.
B)The equilibrium quantity is greater than the socially optimal quantity.
C)The equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The $6 per-unit tax will shift the supply curve to the left by $6. The new equilibrium would be at a higher price and lower quantity. Since there is a negative externality, the socially optimal quantity is lower than the equilibrium quantity. Therefore, the equilibrium quantity is greater than the socially optimal quantity.

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