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

question 16

Multiple Choice

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes 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:

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