The Following Questions Refer to the graph below. -A tax of T₁ per unit on polluted discharge will induce the firm to A)Clean its discharge up to q₁ units per day rather than pay the tax B)Pay the tax rather than clean discharge up to q₁ units per day C)Clean its discharge exceeding q₁ units per day rather than pay the tax D)Pay the tax on all units E)(a)and (d)

Question

Quizplus · Accepted Answer

The tax of T₁ will increase the cost of producing each unit of pollution by the same amount. Therefore, the marginal cost of producing pollution will increase by T₁. The firm will continue to produce pollution up to the point where marginal cost equals marginal benefit, which is at q₁ units per day. Above q₁ units per day, the marginal cost of producing additional pollution will be higher than the marginal benefit, so the firm will clean up its discharge rather than pay the tax. Therefore, the best choice is A.

The Following Questions Refer to the Graph Below