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:

Nominal Interest Rate

The percentage increase in money that borrowers pay lenders, not adjusted for inflation.

Fisher Effect

An economic theory stating that the real interest rate is independent of monetary measures, particularly the nominal interest rate and expected inflation rate.

Menu Costs

The costs to a company associated with changing prices, including the physical costs of changing price tags and the administrative costs of updating systems.

Inflation Rates

The percentage rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling, usually measured over a specific period of time.