Question

Question 3 1pts Consider the market for political advertising during an election campaign. The private marginal cost of producing a political advertisement is PMC 200 +2Qwhere Q is the quantity of advertisements, and the private marginal benefit (demand) curve is PMB 1000 3Q. The marginal negative production externality e in the market is e-3Q (note that the externality from producing an additional advertisement increases with the number of advertisements). Which of the following statements is true? The socially efficient level of output is Q-200, which suppliers will produce if a production tax of $600 is imposed per political advertisement The socially efficient level of output is Q-160, which suppliers will produce if a production tax of $480 is imposed per political advertisement The socially efficient level of output is Q-100, which suppliers will produce if a per unit tax of $300 is imposed on either seller or buyers the socially efficient level of output is Q 160, which supplier will produce if no tax is imposed none of the above

Answer 1

Option (3).

In efficient outcome, PMB = PMC + e

1000 - 3Q = 200 + 2Q + 3Q

800 = 8Q

Q = 100

Unit tax to induce firms to produce efficient output = Q_efficient x e = 100 x 3 = 300