Question

Assume that the city government of Pollutersville taxes the production of electricity in an effort to make the market internalize the external cost imposed on society in the form of pollution of the drinking water?

a. Draw a supply and demand diagram for electricity in Pollutersville. Be sure to label your axes, curves, and intercepts, as well as MSC, MSB, MPC, MSB curves and the amount of the tax.
b. If the government imposes a tax equal to the amount of the marginal external cost generated by each kwh of electricity, is there any deadweight loss in the market?
c. Discuss the changes in welfare for consumers, producers, society, and those individuals affected by the pollution once the tax is imposed.

Answer 1

Answer:



Explanation:

 

b. There will be some deadweight loss equal to marginal external cost minus deadweight loss without tax.

c. Quantity supplied decreases as price increases due to tax imposition. Again as output decreases, employment also decreases. But the individuals who were affected by pollution are now better off. So consumer surplus and producer surplus will decrease but government will earn tax revenue.

The file has been attached for part (A)