Suppose a government knows the firms' production functions and output prices, and can costlessly monitor the effluent released by the chemical factory. If it sets a tax per unit of effluent, the level of this tax that will result in the socially optimal effluent level is equal to
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Suppose a government knows the firms' production functions and output prices, and can costlessly monitor the effluent released by the chemical factory. If it sets a tax t per unit of effluent, the level of this tax that will result in the socially optimal effluent level E̅ is equal to (A) t=10K̅ F̅²/(K̅²+F̅²) (B) t=10K̅²F̅²/(K̅²-F̅²) (C) t=10K̅²F̅²/(K̅²+F̅²) (D) t=5K̅ F̅²/(K̅²+F̅²)
Also written as: Suppose a government knows the firms' production functions and output prices, and can costlessly monitor the effluent released by the chemical factory. If it sets a tax t per unit of effluent, the level of this tax that will result in the socially optimal effluent level E_bar is equal to
Market failure, externalities and public goods has come up 114 times in 7 exams since 2006.
This question is on Pigouvian taxes and corrective policy, part of Market failure, externalities and public goods in Microeconomics.
Using taxes or subsidies to make people face the social cost of their actions.
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Question from the DSE 2008 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.