Figure 4-21

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage.Figure 4-21 illustrates the situation in the toilet paper market.
-Refer to Figure 4-21.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

Question

Figure 4-21
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage.Figure 4-21 illustrates the situation in the toilet paper market.
-Refer to Figure 4-21.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

Quizplus · Accepted Answer

The Pigovian tax should be equal to the external cost caused by the production, which is the environmental damage caused by the bleaching process. In Figure 4-21, the efficient level of production is at P₀ where the marginal social cost equals the marginal social benefit. The current level of production is at P₂ where the marginal private cost is lower than the marginal social cost due to the environmental damage. The tax should be equal to the difference between the marginal social cost and the marginal private cost, which is (P₂-P₀), per ton of output. Therefore, the correct answer is B.

Figure 4-21 Companies Producing Toilet Paper Bleach the Paper to Make It