Suppose that government officials have set an emissions tax to reduce pollution.Assume that the optimal tax would be $1,500,but government officials have set the tax at $500.At the equilibrium with the $500 tax:
A)there will be too much pollution.
B)the marginal social cost of pollution will be less than $500.
C)the marginal social benefit of pollution will be less than $500.
D)the marginal social benefit of pollution will be more than $500.

Question

Quizplus · Accepted Answer

At the equilibrium with the $500 tax, there will be too much pollution because the tax is set lower than the optimal tax of $1,500. This means that polluters will only internalize $500 of the cost of pollution, leading them to underinvest in abatement efforts and resulting in an inefficiently high level of pollution.

Suppose That Government Officials Have Set an Emissions Tax to Reduce