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 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.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

Quizplus · Accepted Answer

The Pigovian tax should be equal to the external cost of production, which is the difference between the social cost (P2) and the private cost (P0). Therefore, the value of the tax per unit of output should be (P2-P0). This will incentivize companies to internalize the external cost and produce the efficient level of output. Option A is incorrect because it only takes into account the difference between the two market prices, not the external cost. Option C is incorrect because it only takes into account the difference between the private cost and market price, not the external cost. Option D is incorrect because it only considers the private cost, not the external cost.

Companies Producing Toilet Paper Bleach the Paper to Make It