Figure 5-5
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 5-5 illustrates the situation in the toilet paper market.
-Refer to Figure 5-5.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 5-5  
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 5-5 illustrates the situation in the toilet paper market.
-Refer to Figure 5-5.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

The efficient level of output is at point U* where the marginal social cost (MSC) equals the marginal social benefit (MSB). The current production level is at point U1 and is producing at a higher level than the efficient level. To bring the production level down to the efficient level, a Pigovian tax should be imposed on the producers. The tax should be equal to the difference between the MSC at U1 and the MSB at U*. In this case, that tax is equal to (P₂- P₀) per ton of output, which is answer choice B.