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Figure: MSB and MSC of Pollution
-(Figure: MSB and MSC of Pollution)Use Figure: MSB and MSC of Pollution.Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society.Suppose that pollution is unregulated.What level of emissions tax would move the level of pollution to the socially optimal level?
A) $100 per tonne
B) $800 per tonne
C) $500 per tonne
D) $300 per tonne

Question

Use the following to answer questions :
Figure: MSB and MSC of Pollution 
-(Figure: MSB and MSC of Pollution)Use Figure: MSB and MSC of Pollution.Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society.Suppose that pollution is unregulated.What level of emissions tax would move the level of pollution to the socially optimal level?
A) $100 per tonne 
B) $800 per tonne 
C) $500 per tonne 
D) $300 per tonne

Quizplus · Accepted Answer

The socially optimal level of pollution is where the MSB equals the MSC, i.e. where the marginal benefit to the firms of producing one more unit of pollution is equal to the marginal cost borne by others in society. From the graph, we can see that this occurs at a level of 30 units of pollution (where MSB = MSC = $500 per tonne). To move the level of pollution to this socially optimal level, the tax should be equal to the gap between the MSC curve and the MSB curve at the socially optimal level of pollution. This corresponds to a tax of $500 - $0 = $500 per tonne. Therefore, the correct answer is C, $500 per tonne.

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