Amanda and Hector each produce homemade ketchu
What will be an ideal response?
a. The benevolent social planner would like to see Amanda make ketchup because the social cost to society per bottle is $1.25 + $2.50 = $3.75, which is less than the benefit received of $4.00. Hector should not make ketchup because the social cost ($1.80 + $2.50 = $4.30 ) is greater than the benefit received.
b. The ideal tax would be $2.50, which is the value of the external cost.
c. If the tax was set at twice the level of the ideal amount, which would be $5.00, both Amanda and Hector would be discouraged from making ketchup because the social cost for each of them would exceed the value of the benefit from each bottle, which is $4.00.
d. If the tax was set at half of the ideal amount, which would be $1.25, neither Amanda nor Hector would be discouraged from making ketchup because the social cost for each of them would be less than the $4.00 benefit.
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A) A B) B C) C D) all of the above
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