Suppose the above figure represents the market for dry cleaning services, which

Question

Suppose the above figure represents the market for dry cleaning services, which use harmful chemicals that could pose risks to human health and the environment if not properly disposed of.

Here the initial market equilibrium quantity is______??thousand. The goal of a Pigouvian tax would be to move the market to a quantiy of______????

A tax in the amount of $_____?? per unit would exactly correct for this externality.

If instead the government imposed a $6 per unit tax on dry cleaning services,_______ thousand??? would be sold to consumers at a price of $______???

Explanation / Answer

1) 4

intial eq when MPC = MPB

so 4

2) when pigouvian tax operates then eq at MSC = MPB.

so 2

3) tax = 6 -2 = 4 per unit

4) Q= 1 and price = 7

because tax is vertical difference between the prices so when tax = 6 then price should be 7 because then vertical distance difference is 6

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