Figure 4-23
Coal burning utilities release sulfur dioxide and nitric acid which react with water to produce acid rain. Acid rain damages trees and crops and kills fish. Because the utilities do not bear the cost of the acid rain, they overproduce the quantity of electricity. This is illustrated in Figure 4-23.
-Refer to Figure 4-23.S₁ represents the supply curve that reflects the marginal private cost of production and S₂ represents the supply curve that reflects the marginal social cost of production.One way to internalize the external cost generated by utilities is to impose a Pigovian tax on the production of electricity.What is the size of the Pigovian tax that will internalize the cost of the externality?
A) P₀
B) P₂-P₀
C) P₁-P₀
D) P₂-P₁

Question

Figure 4-23
  Coal burning utilities release sulfur dioxide and nitric acid which react with water to produce acid rain. Acid rain damages trees and crops and kills fish. Because the utilities do not bear the cost of the acid rain, they overproduce the quantity of electricity. This is illustrated in Figure 4-23.
-Refer to Figure 4-23.S₁ represents the supply curve that reflects the marginal private cost of production and S₂ represents the supply curve that reflects the marginal social cost of production.One way to internalize the external cost generated by utilities is to impose a Pigovian tax on the production of electricity.What is the size of the Pigovian tax that will internalize the cost of the externality?
A) P₀ 
B) P₂-P₀ 
C) P₁-P₀ 
D) P₂-P₁

Quizplus · Accepted Answer

The Pigovian tax is equal to the difference between the marginal social cost and the marginal private cost, which is P₂-P₀.

Figure 4-23 Coal Burning Utilities Release Sulfur Dioxide and Nitric