Consider a monopolist with a private MC of $20 per unit who faces a demand curve of P = 100 - q.There is also a negative consumption externality in the market of $40 per unit.What is the most appropriate policy response if the government wishes to maximize surplus in the market.
A)The government should implement a Pigovian tax of $40 on consumers.
B)The government should implement a Pigovian tax of $40 levied on the monopolist.
C)The government should subsidize production by $40 per unit.
D)Either a or B

Question

Quizplus · Accepted Answer

The most appropriate policy response if the government wishes to maximize surplus in the market, given the presence of a negative consumption externality of $40 per unit, would be to implement a Pigovian tax. A Pigovian tax is a tax imposed on a market activity that is generating negative externalities, with the tax intended to correct an inefficient market outcome by being set equal to the social cost of the negative externalities.

Consider a Monopolist with a Private MC of $20 Per