Final answer:
Total external damages (TED) at the socially efficient level of aggregate emissions (e*_agg) represent the environmental costs that are internalized in the market price when a tax reflecting the externality is imposed. This results in a lower TED compared to no intervention, as pollution levels are reduced to the social optimum, aligning private costs with social costs and reducing deadweight loss.
Step-by-step explanation:
The question is asking about the total external damages (TED) at the socially efficient level of aggregate emissions, denoted by e*_agg. In economics, particularly in the context of pollution, TED refers to the cost of environmental damage that is not reflected in the market price of goods. The socially efficient level is where the market output aligns with the social optimum, meaning it incorporates the external costs of production, such as pollution. This occurs when the supply curve, adjusted to include these external costs, intersects with the demand curve, reflecting the point where social costs are equal to social benefits.
In context, if a tax is imposed on polluting goods to represent the externality cost accurately, then the socially efficient level of aggregate emissions would result in the TED being reflected in the pricing and levels of production. The supply curve would shift to Ssocial and the new equilibrium would reach a point where the external costs are internalized by the market. As a result, the TED at e*_agg would be lower than in a situation without tax because the pollution levels would be reduced to the social optimum.
Implementing a tax policy to reach the social optimum is a way of internalizing externalities, aiming to make private costs align with the actual social costs, thereby reducing the deadweight loss to society caused by the overproduction and subsequent pollution in the unregulated market.