A firm in a perfectly competitive industry has marginal cost MC = 0.4q where q is quantity. The market price is 20 per unit. The production process of this firm is polluting the air and the social marginal cost (including private and pollution cost) is SMC = 0.5q.
A. What is the socially optimal level of production for the firm ?
B. What should be the per unit tax imposed by the government so that the firm produces socially optimal level of output ?
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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 JNU SIS 2020 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.