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

To bring about the efficient level of production, the government should impose a tax equal to the difference between the social cost (P₂) and the private cost (P₀) of producing toilet paper per unit. This is because the social cost includes the environmental damage caused by the bleach, which is not accounted for in the private cost. Therefore, the tax should equal (P₂ - P₀) per unit of output, which is option B.

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