Figure 5.5

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
-Refer to Figure 5.5.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

Question

Figure 5.5
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
-Refer to Figure 5.5.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

Quizplus · Accepted Answer

The Pigovian tax should be equal to the external cost of production, which in this case is the damage caused to the environment due to the discharge of bleach. The efficient level of output is where marginal social cost (MC + tax) equals marginal social benefit (MB), which is at Q*. Referring to the graph, the Pigovian tax should be equal to (P₂ - P₀) per ton of output, as this is the vertical distance between the new marginal private cost (MPC + tax) and the original marginal private cost (MPC) at Q*. Therefore, the correct answer is B.

Figure 5.5 Companies Producing Toilet Paper Bleach the Paper to Make It