Figure 10-2
-Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?
A) Impose a tax of $1.50 per unit of plastic.
B) Impose a tax of $2 per unit of plastic.
C) Impose a tax of $6 per unit of plastic.
D) Offer a subsidy of $1.50 per unit of plastic.

Question

Figure 10-2 
-Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?
A) Impose a tax of $1.50 per unit of plastic. 
B) Impose a tax of $2 per unit of plastic. 
C) Impose a tax of $6 per unit of plastic. 
D) Offer a subsidy of $1.50 per unit of plastic.

Quizplus · Accepted Answer

The optimal policy would be to impose a tax equal to the social cost of production, which in this case is $2 per unit of plastic. This tax would force the firm to internalize the cost of the externality and reduce their production to the socially optimal level where marginal social cost equals marginal social benefit. Option A would not be sufficient to internalize the full social cost and option C would be too high and might lead to unintended consequences. Option D, a subsidy, is not an appropriate policy response to a negative externality.

Figure 10-2 -Refer to Figure 10-2.Suppose That the Production of Plastic Creates