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24 November, 11:54

The private marginal benefit of a product's consumption is PMB = 200 - 2Q, and the private marginal cost of its production is PMC = 2Q. The marginal external damage of this good's production is MD = 4Q. The government imposes a tax on each unit sold in an effort to internalize the externality. How high should the tax be set in order to achieve the social optimum?

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  1. 24 November, 12:20
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    In order to achieve social optimum 100 tax should be set.

    Explanation:

    At socially efficient equilibrium, PMB = PMC + MD

    200-2Q = 2Q + 4Q

    200 = 8Q

    Q = 25

    Tax = MD = 4*25 = 100
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