Use the following figure to answer the question : Figure 20-1 : 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

Use the following figure to answer the question : Figure 20-1 : 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 government should impose a tax equal to the external marginal cost, which is represented by the vertical distance between S₀ and S₁ at the quantity level of Q1. Therefore, option D, which suggests a tax of $20 per unit, is the best choice. This tax will shift the private supply curve upward to S1'T, leading to a decrease in production to Q2, which is efficient.

Use the Following Figure to Answer the Question : Figure