Question 1
If a tax is placed on perfectly competitive firms that impose external costs on society, the firm's marginal cost curve will shift ________ and the industry supply curve will shift to the ________.
◦ down; left
◦ down; right
◦ up; right
◦ up; left
Question 2
Suppose that you rent a house next to a factory. The factory legally emits a chemical into the air that smells like feet. You now have to spend $300 more per month on air fresheners because the firm pollutes the air. You could move to another house far enough away from the factory, but the rent for that house is $200 more than you now pay. The efficient solution to this problem is that
◦ the factory owner should compensate you $300 so that you can pay for the additional expenses you incur.
◦ you should move to the new house because the additional rent on that new house is less than the additional expenses you incur from living next to the factory.
◦ the factory owner should reimburse you $100, the difference between your expenses and the higher rent on the new house.
◦ the firm should be able to continue to pollute because only one person is being harmed by the factory's pollution.
Factory
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