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.
-In Figure 20-1,if the government levies a tax of $8 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 benefit will not exceed the marginal social cost and the good will not be overproduced.
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. 
-In Figure 20-1,if the government levies a tax of $8 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 benefit will not exceed the marginal social cost and the good will not be overproduced. 
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

When a tax of $8 is imposed, the private cost to firms will increase and the supply curve will shift upwards by $8. This new supply curve will intersect with the social marginal cost curve at point B1. Therefore, the equilibrium quantity will decrease from Q* to Q1 while the equilibrium price will increase from P* to P1. Since the social marginal cost curve lies above the private supply curve, there is an overproduction of the good from the social perspective. Thus, the option D is correct.

Use the Following Figure to Answer the Question : Figure