Question

3. The diagram at the right shows, for a given chemical plant, the plant's marginal benefits associated with toxic chemical emissions (MBE) and society's marginal environmental damages stemming from those emissions (SMCE). The government is considering imposing an emissions tax at the rate of t per unit of emissions, as indicated in the diagram. SMC(E) e(2) 0(1) 0(0入 MB(E) (a) Relative to the no-regulation status quo, what is the efficiency gain that would result from this tax. Delineate and refer to relevant sections of the diagram. With reference to the diagram, explain why this tax fails to maximize the potential efficiency gains.