The graph below shows the marginal social benefit and marginal social cost of po

Question

The graph below shows the marginal social benefit and marginal social cost of pollution.

(1 pt) What is the optimal level of pollution shown on the graph?

(1 pt) Would a new regulation that resulted in the level of pollution shown by Q3 be considered too lenient? Please explain.

(1 pt) Would the dollar amount of the Pigovian tax necessary to make this market operate efficiently be $10, $40, $50, $60, or $100?

(1 pt) If new research indicated that the negative effects of a this pollutant were worse that we had though which of the curves would shift, and in what direction?

Explanation / Answer

I got the image on Drive Link.

(i). Optimal Level of Pollution is given by the point where Marginal Social Cost = Marginal Social Benefit.

Thus optimal level of pollution is Q2 as shown in tha diagram.

(ii) Yes,  a new regulation that resulted in the level of pollution shown by Q3 be considered too lenient. You can see that as per new regulation, producers can produce Q3 level of pollution which is higher than the socially optimal pollution. Also corresponding to Q3 level of pollution, Marginal Social Cost is much higher than what consumers are paying i.e. Marginal Social Benefit.

(iii). Pigovian taxes are the taxes levied on the firms polluting, so that socially potimal output can be produced. So if we could tax firms by $10, it will ensure that socially optimal output is achieved. So amount of pigouvian taxes needed =$10

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