Figure 5-9

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 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.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 5-9
  
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 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.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

To bring about the efficient level of production, the government should impose a tax equal to the external cost of producing toilet paper. In this case, the external cost is the environmental damage caused by the discharge of bleach into rivers and lakes. The efficient level of production occurs at Q₀, where the marginal social cost (MSC) equals the marginal social benefit (MSB). The Pigovian tax should be equal to the vertical distance between the MSC curve and the supply curve at Q₀, which is equal to (P₂-P₀) per unit of output. Therefore, choice B is the correct answer.

Figure 5-9 Companies Producing Toilet Paper Bleach the Paper to Make It