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Author Question: In the presence of a negative externality generated by producing a good, a competitive market will ... (Read 26 times)

sabina

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on: Jul 1, 2018
In the presence of a negative externality generated by producing a good, a competitive market will produce more of that good than is socially optimal.
 
  What will be an ideal response?

Question 2

To maximize welfare in a competitive market that has a negative externality in production, government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.
 
  Indicate whether the statement is true or false


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cassie_ragen

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Reply #1 on: Jul 1, 2018
Answer to Question 1

True. Firms in that market only consider their private costs and produce a quantity that equates price with the private marginal cost. Producers ignore the external costs to others. As a result, p = MCp instead of p = MCs.

Answer to Question 2

False. The tax should equal the marginal harm of the pollution at the socially optimal quantity of the good.


sabina

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Reply 2 on: Jul 1, 2018
Gracias!

kusterl

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Reply 3 on: Yesterday
Excellent

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