Essay
The demand curve and supply curve for a good are given by QD = 100 - 5P and QS = 1.25P - 2.5. Suppose the production of this good creates a negative externality, where the external marginal cost is constant at $2.
a. To achieve the socially optimal output level, what size tax should the government implement?
b. Based on your answer to part a, what price will buyers pay and what price will sellers receive net of the tax?
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a. The Pigouvian tax should equal the ex...View Answer
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