Suppose That Electricity Producers Create a Negative Externality Equal to $5

question 391

Multiple Choice

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government impose a $5 per-unit tax on the producers.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

• A) They are equal.
• B) The after-tax equilibrium quantity is greater than the socially optimal quantity.
• C) The after-tax equilibrium quantity is less than the socially optimal quantity.
• D) There is not enough information to answer the question.

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Definitions:

Dividend Tax Credit

A tax credit that investors can claim in many jurisdictions for taxes already paid by a corporation on the dividends it distributes to shareholders.

Tax Legislation

Laws and regulations governing the imposition, administration, and enforcement of taxes by the government.

Letters Patent Corporation

A document issued by a government granting rights, privileges, or status to an individual or company, historically used to establish corporations.

Limited Liability Partnership

A partnership where some or all partners have limited liabilities, meaning they are not personally responsible for the debts of the business.