The demand curve and supply curve for a good are given by Q^D = 100 - 5P and Q^S = 1.25P - 2.5. Suppose the production of this good creates a negative externality, where the external marginal cost is constant at $2. To achieve the socially optimal output level, the government can implement a tax in the amount of $____. A) 3.00 B) 2.50 C) 2.00 D) 1.50

Question

Quizplus · Accepted Answer

To achieve the socially optimal output level when there's a negative externality, the government should implement a tax equal to the external marginal cost, which is given as $2. This makes the producers internalize the external cost, aligning private costs with social costs.

The Demand Curve and Supply Curve for a Good Are