Refer to the above supply and demand graph. In the graph, line S is the current supply of this product, while line S₁ is the optimal supply from the society's perspective. One solution to this externality problem is to: A) Give consumers a subsidy of the amount FG per unit B) Give producers a subsidy of the amount AB per unit C) Tax producers by the amount DE per unit D) Tax consumers by the amount EF per unit

Question

Quizplus · Accepted Answer

In order to reach the optimal supply from society's perspective, a tax should be imposed on producers equal to the vertical distance between S and S₁, which is DE per unit. This tax will increase the cost of production for the producers, incentivizing them to produce less, and reducing the negative externality caused by overproduction. A subsidy for consumers or producers would not address the externality problem and could even exacerbate it. A tax on consumers would be difficult to administer in this case as it is not clear how to identify individuals who generate the negative externality.

Refer to the Above Supply and Demand Graph