Figure 11-13 Coal burning utilities release sulphur 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 11-13.
-Refer to Figure 11-13.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 internalise 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 internalise the cost of the externality?

Question

Figure 11-13

Coal burning utilities release sulphur 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 11-13.
-Refer to Figure 11-13.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 internalise 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 internalise the cost of the externality?

Quizplus · Accepted Answer

The Pigovian tax should equal the difference between the social cost and the private cost, which is represented by the vertical distance between the two supply curves, S₂ and S₁, at the socially optimal quantity. This difference is P₂ - P₀.

Figure 11-13 Coal Burning Utilities Release Sulphur Dioxide and Nitric