Suppose that the government could accurately measure the marginal cost of an externality such as water pollution. In order to reduce production from a plant that emits water pollution, the government places an optimal emissions fee on the plant. The final amount of production equates demand with the marginal social cost to society. The deadweight loss associated with this fee is
A) equal to the amount of the tax.
B) equal to the quantity reduction as a result of the tax.
C) measured as $\frac { 1 } { 2 } ( \Delta Q \Delta P )$.
D) zero.

Question

Suppose that the government could accurately measure the marginal cost of an externality such as water pollution. In order to reduce production from a plant that emits water pollution, the government places an optimal emissions fee on the plant. The final amount of production equates demand with the marginal social cost to society. The deadweight loss associated with this fee is 
A) equal to the amount of the tax.
B) equal to the quantity reduction as a result of the tax.
C) measured as $\frac { 1 } { 2 } ( \Delta Q \Delta P )$.
D) zero.

Quizplus · Accepted Answer

If the government accurately measures the marginal cost of an externality and places an optimal emissions fee on the plant, production will be reduced to the socially optimal level where marginal social cost equates demand. This means that there will be no deadweight loss associated with the fee, as the market is now operating efficiently. Therefore, the correct choice is D) zero. The other options are incorrect as they do not accurately reflect the impact of the emissions fee on the market.

Suppose That the Government Could Accurately Measure the Marginal Cost 12(ΔQΔP)\frac { 1 } { 2 } ( \Delta Q \Delta P )21​(ΔQΔP)

Suppose That the Government Could Accurately Measure the Marginal Cost $\frac { 1 } { 2 } ( \Delta Q \Delta P )$