Question

TRUE OR FALSE

1. To maximize welfare in a competitive market that has a negative externality in production, government should tax a pollution-generating good at a unit tax equal to the marginal cost of the externality.
2. If there is deadweight loss, we say a market failure has occurred.
3. If two identical firms behave according to the Stackelberg model, the joint production is higher than if the same firms act as a Cournot.
4. The outcome of the Stackelberg model is a Nash equilibrium

Answer 1

Q1) true

a pigouvian tax is imposed to correct negative externality, that equals Marginal damage

Q2) true

DWL occus, when total Surplus is not maximized, so some form of market failure occurs

Q3) true

in Stackelberg game, the joint Production is always higher than cournot game

Q4) true

In Stackelberg model, we solve the game via backward induction, so it is both SPNE & NE