Coal burning utilities release sulfur dioxide and nitric acid which react with water to produce acid rain.Acid rain damages trees and crops and kills fish.Because the utilities do not bear the cost of the acid rain,they overproduce the quantity of electricity.This is illustrated in Figure 5-11.
-Refer to Figure 5-11.S1 represents the supply curve that reflects the private cost of production and S2 represents the supply curve that reflects the social cost of production.One way to internalize the external cost generated by utilities is to impose a Pigovian tax on the production of electricity.What is the size of the Pigovian tax that will internalize the cost of the externality?

Question

Quizplus · Accepted Answer

The Pigovian tax is equal to the difference between the social cost of production and the private cost of production. In this case, the social cost of production is S2 and the private cost of production is S1. Therefore, the Pigovian tax is equal to P2 - P0.

Coal Burning Utilities Release Sulfur Dioxide and Nitric Acid Which