What is the Pigovian Tax? Use a figure to explain. Can it be used to correct for the externality? Derive the Pigovian tax and characterize the social optimum solution. Can a standard achieve the social optimum? What about a quota? Explain using a figure.
What is the Pigovian Tax? Use a figure to explain. Can it be used to correct for the externality? Derive the Pigovian tax and characterize the social optimum solution. Can a standard achieve the social optimum? What about a quota? Explain using a figure.
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter11: Public Goods And Common Resources
Section: Chapter Questions
Problem 2PA
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Assume a market for fertilizers, and let D denote the demand of fertilizers while S their supply. The inverse demand is p = 10 - q, and the supply is MC = q. The marginal damage created by runoff water being exposed to fertilizers is MEC = q/2
The use of fertilizers is creating an externality and the government wishes to intervene in the market.
- Use a figure to depict the competitive outcome. Derive the competitive equilibrium outcome.
- Use a second figure to explain the negative externality attributed to the use of fertilizers. The use of fertilizers improves yield, but it also damages the underground aquifer.
- What is the Pigovian Tax? Use a figure to explain. Can it be used to correct for the externality? Derive the Pigovian tax and characterize the social optimum solution.
- Can a standard achieve the social optimum? What about a quota? Explain using a figure.
Explain and show step-by-step for last two questions please!
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Step 1
A negative externality is a cost or negative impact imposed on a third by the production or consumption of a good or service by an economic agent. This cost is not reflected in the market price nor is accounted for by the producer or consumer.
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