Figure 10-2

-Refer to Figure 10-2.Assume the production of the product shown by the graph imposes a cost on society of $7.00 per unit.If the free market equilibrium output is 50 units,the government should
A)impose a tax of $2.50 per unit.
B)increase the output of the firm by 25 units.
C)impose a lump-sum tax of $350 per period.
D)impose a tax of $7.00 per unit.

Question

Figure 10-2
 
-Refer to Figure 10-2.Assume the production of the product shown by the graph imposes a cost on society of $7.00 per unit.If the free market equilibrium output is 50 units,the government should
A)impose a tax of $2.50 per unit. 
B)increase the output of the firm by 25 units. 
C)impose a lump-sum tax of $350 per period. 
D)impose a tax of $7.00 per unit.

Quizplus · Accepted Answer

In order to internalize the externality and account for the cost imposed on society, the government should impose a tax equal to the external cost of $7.00 per unit. This will shift the supply curve upward by $7.00, leading to a new equilibrium output of 37 units, at which the price will be $11.00 per unit.

Figure 10-2 -Refer to Figure 10-2.Assume the Production of the Product Shown