Consider a monopolist with a marginal cost curve MC = 5 + Q who faces a...
Consider a monopolist with a marginal cost curve MC = 5 + Q who
faces a demand curve P = 35 - .5*Q. Finally, assume that the
production of this good also emits a per-unit externality of 7.5.
That is, the marginal damage to third-parties is 7.5.
What per-unit tax can the government levy upon the business to
assure that only the socially optimal amount of output is
produced?
Homework Answers
In case of negative externality, an optimal tax is imposed when the per unit tax equals the per unit external cost imposed by the producer.
In the given case, per unit external cost equals $7.5
This implies the per unit tax that the government must impose on the business equals $7.5 in order to produce the socially optimal amount of output.
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Consider a monopolist with a marginal cost curve MC = 5 + Q who
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