Figure 9.7
-A firm that generates pollution is illustrated in Figure 9.7. If the government imposes a pollution tax equal to P₂ and the firm's abatement level is A₃ the firm is
A) abating more than is optimal for the firm.
B) abating less than is optimal for the firm.
C) choosing an abatement level that is optimal.
D) violating the environmental protection laws.

Question

Figure 9.7
-A firm that generates pollution is illustrated in Figure 9.7. If the government imposes a pollution tax equal to P₂ and the firm's abatement level is A₃ the firm is
A) abating more than is optimal for the firm. 
B) abating less than is optimal for the firm. 
C) choosing an abatement level that is optimal. 
D) violating the environmental protection laws.

Quizplus · Accepted Answer

When a firm is taxed for pollution at a level P₂ and chooses an abatement level A₃, it is abating more than what would be optimal for minimizing its total costs (including both abatement costs and taxes). This is because the optimal abatement level from the firm's perspective would be where the marginal cost of abatement equals the tax rate, which is less than A₃.

Figure 9.7 -A Firm That Generates Pollution Is Illustrated in Figure 9.7