Suppose unregulated production of pesticides results in an equilibrium price and quantity of $400 and 1,000 tons per day, respectively, and a marginal external cost of $10 a ton
a) If the government were to eliminate the external cost by using taxes, what should the tax equal?
b) Would the government action described above affect the quantity of pesticides produced? If yes, how? If no, why not?
a) $10 a ton
b) Yes, with the tax the output of pesticides would be decreased to the efficient level.
Economics
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