Refer to Figure 6, Panel (b) and Panel (c). Which of the following is correct? a. A tax would move the market in Panel (c) closer to the socially optimal outcome, but a subsidy would move the market in Panel (b) closer to the socially optimal outcome. b. A subsidy would move the market in Panel (b) and the market in Panel (c) closer to the socially optimal outcome. c. A tax would move the market in Panel (b) and the market in Panel (c) closer to the socially optimal outcome. d. A subsidy would move the market in Panel (c) closer to the socially optimal outcome, but a tax would move the market in Panel (b) closer to the socially optimal outcome.
Economics: Public Economics
Question: 1
Figure 6 (Graph 5)
Refer to Figure 6, Panel (b) and Panel (c). Which of the following is correct?
a. A tax would move the market in Panel (c) closer to the socially optimal outcome, but a subsidy would move the market in Panel (b) closer to the socially optimal outcome.
b. A subsidy would move the market in Panel (b) and the market in Panel (c) closer to the socially optimal outcome.
c. A tax would move the market in Panel (b) and the market in Panel (c) closer to the socially optimal outcome.
d. A subsidy would move the market in Panel (c) closer to the socially optimal outcome, but a tax would move the market in Panel (b) closer to the socially optimal outcome.
Question: 2
Two arms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each arm 40 pollution permits, which it can either use or sell to the other arm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that
a. Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100.
b. Both arms will use their own pollution permits.
c. Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200.
d. Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.
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