Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

Question

Quizplus · Accepted Answer

The tax will increase the cost of production by $8 per unit, leading to a decrease in the quantity produced as producers will now face higher costs. However, the negative externality of $6 per unit still exists, and the market does not account for this cost. Therefore, the socially optimal quantity of electricity produced is lower than the after-tax equilibrium quantity. This means that the after-tax equilibrium quantity is greater than the socially optimal quantity.

Suppose That Electricity Producers Create a Negative Externality Equal to $6