Setting taxes equal to marginal external costs are modeled by creating a new social cost curve that is
A)lower than the original supply curve.
B)higher than the original supply curve.
C)lower than the original demand curve.
D)higher than the original demand curve.

Question

Quizplus · Accepted Answer

Setting taxes equal to marginal external costs shifts the supply curve upwards, as producers now have to pay the tax for the pollution they create. The new social cost curve would intersect the original supply curve at the point where they both equal the marginal external cost. This intersection point would be higher than the original supply curve, indicating a higher price for the good to account for the external cost of pollution. Thus, the correct answer is B, higher than the original supply curve.

Setting Taxes Equal to Marginal External Costs Are Modeled by Creating