Question

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.

Refer to Figure 5-9. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax be?

(P2- P1) per unit of output

P1 per unit of output

(P2- P0) per unit of output

(P1- P0) per unit of output

Answer 1

A Pigovian tax on toilet paper production should be equal to the difference between the marginal social cost (MSC) and the marginal private cost (MPC) per unit of output.

Step-by-step explanation:

A Pigovian tax is a tax imposed on goods or services that generate negative externalities, such as pollution. In the case of toilet paper production, the bleach used in the manufacturing process causes environmental damage when discharged into rivers and lakes. To bring about the efficient level of production, the government should impose a tax equal to the difference between the marginal social cost (MSC) and the marginal private cost (MPC) of production per unit of output.