Let MC be the marginal private cost per megawatt hour (Mwh) of producing electricity using coal. Let MSC be the marginal social cost per Mwh and T be the tax per Mwh. To achieve efficiency, the tax should be set so that
A) MC = MSC + T.
B) MSC = MC + T.
C) MC + MSC = T.
D) MC = T.

Question

Quizplus · Accepted Answer

To achieve efficiency, the tax should be set so that the marginal private cost (MC) plus the tax (T) equals the marginal social cost (MSC), accounting for externalities.

Let MC Be the Marginal Private Cost Per Megawatt Hour