Suppose government officials have set an emissions tax to reduce pollution. Assume the optimal tax would be $1,500, but government officials have set the tax equal to $500. Then, we can conclude that at equilibrium:

A. there will be too much pollution.

B. the marginal damage from pollution will be greater than $500.

C. the marginal abatement cost will be $500.

D. all of the above will occur.

Question

Celeste Ritter

Business

7 September, 09:54

Suppose government officials have set an emissions tax to reduce pollution. Assume the optimal tax would be $1,500, but government officials have set the tax equal to $500. Then, we can conclude that at equilibrium:

A. there will be too much pollution.

B. the marginal damage from pollution will be greater than $500.

C. the marginal abatement cost will be $500.

D. all of the above will occur.

+2

Answers (1)

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Bruce · Answer 1

A) there will be too much pollution.

Explanation:

If the optimal tax was $1,500, then the marginal cost of pollution = $1,500

Since the tax is set at a cost ($500) much lower than marginal cost of pollution ($1,500), then the companies will have virtually no incentives to reduce pollution. They are actually saving money by polluting, since the cost of reducing pollution is much higher than the tax levied on pollution.