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.If the government levies a tax of $28 per unit of output,then:
A)the marginal social benefit will exceed the marginal social cost and the good will be underproduced.
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced.
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced.
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

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.If the government levies a tax of $28 per unit of output,then:
A)the marginal social benefit will exceed the marginal social cost and the good will be underproduced. 
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced. 
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced. 
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

Quizplus · Accepted Answer

A tax increases the cost of production, leading to a decrease in output. If the marginal social benefit exceeds the marginal social cost, the good is underproduced.

Use the Following Figure to Answer the Question : Figure