-The figure above illustrates the petrol market. There is no external benefit from petrol. If a pollution tax equal to the marginal external cost is imposed on petrol, then the quantity of petrol produced and consumed equals

Question

Quizplus · Accepted Answer

Imposing a pollution tax equal to the marginal external cost would shift the supply curve upwards to reflect the true cost of production, including the externalities. This would lead to a new equilibrium where the quantity produced and consumed is at the point where the social cost (including the tax) intersects with the demand curve, which is typically at a lower quantity than without the tax. Without seeing the figure, the general principle in environmental economics suggests that the correct answer would aim to internalize the externality, thus reducing the quantity from the unregulated level to a socially optimal level, which is often less than the initial quantity but not zero.

-The Figure Above Illustrates the Petrol Market