A per unit tax equal to P₁ - P₃ would result in firms producing the socially efficient level of a waste-generating good.

Question

Quizplus · Accepted Answer

If a tax is levied equal to the difference between the private cost (P₁) and the social cost (P₃) of producing a good that generates waste, then firms will factor in the social cost of production and reduce their output level to the socially efficient level. This is because the tax will increase the marginal cost of production for the firms, making it more costly to produce the good, and therefore incentivizing them to reduce their output level.

A Per Unit Tax Equal to P1 - P3 Would

A Per Unit Tax Equal to P₁ - P₃ Would