In the figure given below,D 1 and S 1 are the private demand and supply curves,of a commodity produced by a competitive firm.S 2 reflects the social marginal cost of production,while S 0 represents the external marginal cost.
-Refer to Figure 20-1.Which of the following policies can be adopted by the government to increase production from the equilibrium level to the efficient level?
A)Provide a subsidy of $30 per unit
B)Impose a tax of $100 per unit
C)Provide a subsidy of $100 per unit
D)Impose a tax of $20 per unit

Question

In the figure given below,D 1 and S 1 are the private demand and supply curves,of a commodity produced by a competitive firm.S 2 reflects the social marginal cost of production,while S 0 represents the external marginal cost. 
-Refer to Figure 20-1.Which of the following policies can be adopted by the government to increase production from the equilibrium level to the efficient level?
A)Provide a subsidy of $30 per unit 
B)Impose a tax of $100 per unit 
C)Provide a subsidy of $100 per unit 
D)Impose a tax of $20 per unit

Quizplus · Accepted Answer

To increase production from the equilibrium level to the efficient level, the social marginal cost of production needs to be internalized by the firm. This can be achieved by imposing a tax equal to the external marginal cost of production, which is represented by S₀ in the figure. Option D proposes imposing a tax of $20 per unit, which is equal to the external marginal cost of production. Therefore, option D is the best choice to achieve the goal. Options A and C propose providing subsidies, which would result in an increase in production but not necessarily lead to the efficient level of production. Option B proposes imposing a tax higher than the external marginal cost, which would lead to a lower quantity produced than the efficient level.

In the Figure Given Below,D1 and S1 Are the Private

In the Figure Given Below,D₁ and S₁ Are the Private