Question

The Pigovian tax that achieves the efficient quantity of output is

A) $0.
B) $10 a tonne.
C) $20 a tonne.
D) $30 a tonne.
E) $40 a tonne.

Answer 1

The efficient Pigovian tax rate that would result in the firm abating the efficient quantity of pollution is $100 per pound, which equates to $1,000 per 10 pounds.

Step-by-step explanation:

The Pigovian tax that achieves the efficient quantity of output would be the tax amount that aligns the marginal cost of abatement with the tax on pollution. In the case provided, the firm faces a decision to abate pollution or pay a pollution tax. The marginal costs of abatement for the firm are $300 for the first 10 pounds, $500 for the second 10 pounds, and $900 for the third 10 pounds. Beyond this point, the cost to abate further pollution ($1,500 for the fourth 10 pounds) exceeds the $1,000 per 10 pounds tax. Hence, the firm is incentivized to abate 30 pounds and pay the tax for any additional pollution since the marginal cost of abatement is less than the pollution tax up to that point. Therefore, the efficient Pigovian tax rate that would induce the firm to abate pollution to the efficient amount is $1,000 per 10 pounds or $100 per pound.