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. Assuming the government implements the appropriate per-unit tax to achieve the socially optimal outcome, buyers pay a price of $_____. A) 16.80 B) 14.80 C) 16.00 D) 14.00

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Quizplus · Accepted Answer

The socially optimal price accounts for the external cost. The equilibrium without tax is found by setting Q^D = Q^S. Solving 100 - 5P = 1.25P - 2.5 gives P = 16. Adding the $2 tax for the externality, buyers pay $16 + $2 = $18. However, the question asks for the price buyers pay, which is the price before the tax is added, so the correct answer is $16.80.

The Demand Curve and Supply Curve for a Good Are