Question

A policy maker is unsure of the true marginal damages associated with a good, but they know that the marginal externality is constant and somewhere between $10 and $50 per unit, so the regulator imposes a tax of $35.Even though the tax rate might be wrong, the regulator knows that imposing the tax raises social welfare compared to having no tax at all.

O True
O False

Answer 1

Answer: True

Step-by-step explanation:

Marginal externality is constant. However, it may not be calculated with accuracy. Hence, there's need for estimates at reasonable levels.

Hence, the policymaker's estimate of $35/ unit is reasonable and within the acceptable range of between $10 and $50/unit. Also, the tax charge raises social welfare compared to no tax at all.