Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government impose a $5 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?
A) They are equal.
B) The after-tax equilibrium quantity is greater than the socially optimal quantity.
C) The after-tax equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The $5 per-unit tax internalizes the negative externality, aligning private costs with social costs, thus making the after-tax equilibrium quantity equal to the socially optimal quantity.

Suppose That Electricity Producers Create a Negative Externality Equal to $5