Figure: Negative Externality

question 30

Short Answer

Figure: Negative Externality
The figure shows the market for a good that causes a negative externality when consumed. The government decides to begin taxing its producers. Using the information provided in the figure, answer the following questions.
a. What is the market quantity in this market?
b. What is the social cost of the product?
c. When the product is taxed, what is the dollar amount of the deadweight loss that is removed from the market?
d. What is the new efficient quantity in this market after the tax has been imposed?

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Definitions:

Cost Concept

An accounting principle that dictates that all assets are recorded and reported at their original purchase cost rather than their current market value.

Owner's Equity

The residual interest in the assets of a business after all liabilities have been deducted, often referred to as net assets or shareholder equity.

Assets

Resources owned by a business with future economic benefits.

Investments

The balance sheet caption used to report long-term investments in stocks not intended as a source of cash in the normal operations of the business.