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:

Social Planner

A theoretical decision-maker in economics who aims to achieve optimal outcomes for society by considering the allocation of resources and distribution of goods and services.

Subsidy

A payment made by the government to a firm, industry, or individual, usually to encourage the production of a certain good or service or to reduce its price for consumers.

Output

The quantity of goods or services produced in a given time period, by a firm, industry, or country.

Internalized

The process of incorporating external costs or benefits into one's own decision-making criteria.