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?

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17-03-2020
Business

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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?

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ewomazinoade ewomazinoade · Answer 1 · 2020-03-19T02:24:19+01:00

Answer:

They are equal

Explanation:

Negative externality is when the benefits of economic activities to third parties is less than its costs.

A tax is levied on negative externality to reduce quantity produced to the social optimal quantity.

If the amount of tax is equal to the amount of total negative externality, then after-tax equilibrium quantity will be equal to social optimal quantity.

If the amount of tax is less than the amount is equal to the amount of total negative externality, then after-tax equilibrium quantity will be greater than the social optimal quantity.

If the amount of tax is greater than the amount is equal to the amount of total negative externality, then after-tax equilibrium quantity will be less than the social optimal quantity.

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topeadeniran2 topeadeniran2 · Answer 2 · 2021-11-24T12:55:29+01:00

The relationship will be that the equilibrium quantity is less than the socially optimal quantity.

Negative externality refers to when the consumption or production of a product results in a cost to a third party.

It should be noted that the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced is that equilibrium quantity is less than the socially optimal quantity.

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