Suppose the market for oranges is perfectly competitive and unregulated.Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges.Suppose Q_D = 1000 - 100P and Q_S = -100 + 100P.The tax that would have to exist to achieve the socially optimal level of production would be A)$0 B)$.50 C)$1 D)$2

Question

Quizplus · Accepted Answer

To achieve the socially optimal level of production, the market would need to internalize the external cost of the environmental damage caused by the chemicals used to keep the oranges insect-free. This can be done by imposing a tax equal to the external cost per bushel of oranges, which is $1. A $1 tax per bushel would shift the supply curve upwards by $1, so the new supply curve would be Q_D + $1. At the new equilibrium point, the quantity produced would be lower (Q2) and the price would be higher (P2) than in the unregulated market, resulting in a socially optimal level of production that takes into account the environmental damage caused by the production of oranges.

Suppose the Market for Oranges Is Perfectly Competitive and Unregulated