Suppose the market for oranges is perfectly competitive and unregulated.Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges.Suppose Q_D = 1000 - 100P and Q_S= -100 + 100P.If regulators limited production to 200 bushels,the deadweight loss relative to the option of setting the optimal tax would be would be A) $0 B) $200 C) $500 D) $1000

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Quizplus · Accepted Answer

The deadweight loss is calculated as the difference in total welfare between the optimal tax scenario and the production limit scenario. The optimal tax would internalize the externality, leading to a socially optimal quantity. Limiting production to 200 bushels creates a deadweight loss of $500.

Suppose the Market for Oranges Is Perfectly Competitive and Unregulated