Suppose the government imposes an emissions tax of $t on each unit of pollution produced by a firm.Under which of the following circumstances would the tax rate be set too high to achieve allocative efficiency?

Question

Quizplus · Accepted Answer

If the tax rate is set greater than the marginal external cost of pollution, it is possible that the tax rate is too high to achieve allocative efficiency. This is because the goal of the emissions tax is to align the private cost of production with the social cost by making the firm pay for the externalities it imposes on society. If the tax rate exceeds the marginal external cost of pollution, it may lead to overcompensation of the harm caused, resulting in a loss of economic efficiency. Therefore, the tax rate should be set equal to the marginal external cost of pollution to achieve allocative efficiency.

Suppose the Government Imposes an Emissions Tax of $T on Each