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.If regulators limited production to 200 bushels,the deadweight loss relative to the option of setting the optimal tax would be would be A)$0 B)$200 C)$500 D)$1000

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Quizplus · Accepted Answer

The optimal tax would internalize the externality, leading to a reduction in quantity to the socially optimal level. Limiting production to 200 bushels without a tax creates a deadweight loss, calculated as the area of the triangle between the supply and demand curves from 200 to the equilibrium quantity.

Suppose the Market for Oranges Is Perfectly Competitive and Unregulated