Question

Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

Answer 1

Answer:

b. The after-tax equilibrium quantity is less than the socially optimal quantity

Explanation:

Negative externality is when the cost of either production or consumption activities to third parties exceeds its benefits.

An example of an activity that generates negative externality is pollution.

One way to reduce externality is through taxation.

The amount of negative externality generated is $6 but the amount of tax imposed is $8. The tax would reduce equilibrium quantity by $8 while the amount of negative externality produced is $6.