Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution generating good. All of the following will result from the tax except
A) an increase in the equilibrium market price.
B) a decrease in the equilibrium quantity produced and consumed.
C) a decrease in market supply of the good.
D) an increase in the demand for the good.

Question

Quizplus · Accepted Answer

Imposing a tax equal to the value of the marginal external cost at the optimal output will lead to a decrease in the equilibrium quantity produced and consumed (B) and a decrease in market supply of the good (C). It will also result in an increase in the equilibrium market price (A) due to the increase in the cost of production. However, it will not result in an increase in the demand for the good (D), as the tax will make the good relatively more expensive compared to its substitutes in the market, leading to a decrease in demand.

Suppose a Tax Equal to the Value of the Marginal