Figure 9.10
-The pollution tax in Figure 9.10
A) increases equilibrium output.
B) internalizes the pollution externality.
C) increases supply.
D) all of the above

Question

Figure 9.10
-The pollution tax in Figure 9.10
A) increases equilibrium output. 
B) internalizes the pollution externality. 
C) increases supply. 
D) all of the above

Quizplus · Accepted Answer

The pollution tax internalizes the pollution externality by increasing the private cost of production, shifting the supply curve upward and leftward until it intersects with the demand curve at the new equilibrium with lower output and higher price. Thus, the pollution tax reduces pollution and improves allocative efficiency without reducing economic efficiency.

Figure 9.10 -The Pollution Tax in Figure 9.10