Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution generating good.All of the following will result from the tax except
A)an increase in the equilibrium market price.
B)a decrease in the equilibrium quantity produced and consumed.
C)a decrease in market supply of the good.
D)an increase in demand for the good.

Question

Quizplus · Accepted Answer

A tax equal to the value of the marginal external cost at the optimal output will increase the cost of production for the pollution-generating good. This will cause a decrease in the equilibrium quantity produced and consumed (B) and a decrease in the market supply of the good (C). Since the cost of production increases, the equilibrium market price will also increase (A). However, there will not be an increase in the demand for the good (D) as the tax will increase the cost for consumers as well, leading to a decrease in demand.

Suppose a Tax Equal to the Value of the Marginal