Figure 10-2

-Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?
A)Impose a tax of $7.50 per soccer ball.
B)Impose a tax of $7 per soccer ball.
C)Offer a subsidy of $3 per soccer ball.
D)Offer a subsidy of $2.50 per soccer ball.

Question

Figure 10-2
 
-Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?
A)Impose a tax of $7.50 per soccer ball. 
B)Impose a tax of $7 per soccer ball. 
C)Offer a subsidy of $3 per soccer ball. 
D)Offer a subsidy of $2.50 per soccer ball.

Quizplus · Accepted Answer

To internalize the cost of the externality, the government can impose a tax on the production of soccer balls equal to the marginal social cost (MSC) at the quantity produced by the market, which is $7 per soccer ball in this case. This tax would shift the supply curve leftwards and create a new equilibrium where the firm would produce less, and the price would increase, reducing the quantity of soccer balls consumed to the socially optimal level. The other options are not appropriate because a subsidy would increase production and consumption, exacerbating the negative externalities associated with soccer ball production.

Figure 10-2 -Refer to Figure 10-2.Suppose That the Production of Soccer Balls