Question 1
The following diagram shows a price-taking firm that creates pollution when it produces. As a result, the firm's marginal social cost (
MSC) is above its marginal private cost (
MC).
What is the optimum tax?
◦ cd
◦ ca
◦ ab
◦ da
Question 2
The following diagram shows the production of fertiliser by a perfectly competitive profit-maximising firm. Production of the good leads to pollution of the environment, however. This pollution is an external cost to the firm.
The marginal social cost curve is shown by one of the two curves
I or
I. A
ssume that the government imposes a 'pollution tax' on the firm at a constant rate per unit of output. What must the size of the tax per unit be in order to persuade the firm to produce the socially efficient level of output?
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C1 —
C3◦
C3 —
C4◦
C2 —
C5◦
C3 —
C5
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