Figure 5-9 Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax be?

Question

Figure 5-9  Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax be?

Quizplus · Accepted Answer

A Pigovian tax should be equal to the external cost imposed on society by the production of toilet paper, which is the difference between the social cost (P2) and the private cost (P0). Therefore, the tax should be equal to (P2 - P0) per ton of output, as stated in option B. Option A represents only the difference between the market price and the private cost, while option C and D do not take into account the external cost.

Figure 5-9 Companies Producing Toilet Paper Bleach the Paper