-In the above figure, market equilibrium at point E yields the quantity X. The quantity X* is socially optimal amount. The government can achieve the optimal outcome by
A) setting the price at P1.
B) establishing a tax of P3 - P1 per unit of the good sold.
C) establishing a tax of P3 - P2 per unit of the good sold.
D) setting the price at P4.

Question

-In the above figure, market equilibrium at point E yields the quantity X. The quantity X* is socially optimal amount. The government can achieve the optimal outcome by
A) setting the price at P1. 
B) establishing a tax of P3 - P1 per unit of the good sold. 
C) establishing a tax of P3 - P2 per unit of the good sold. 
D) setting the price at P4.

Quizplus · Accepted Answer

Establishing a tax of P3 - P1 per unit of the good sold can correct the market failure by internalizing the externality, aligning the private cost with the social cost, and moving the quantity sold from X to the socially optimal quantity X*.

-In the Above Figure, Market Equilibrium at Point E Yields