Author Question: In the presence of a negative externality generated by producing a good, a competitive market will ... (Read 66 times)

sabina · **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

cassie_ragen · **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.