The private marginal benefit associated with a product’s consumption is PMB = 360 – 4Q and the private marginal cost associated with its production is PMC = 6Q. Further- more, the marginal external damage associated with this good’s production is MD = 2Q. To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should it set to achieve the social optimum?

The private marginal benefit associated with a product’s consumption is PMB = 360 – 4Q and the private marginal cost associated with its production is PMC = 6Q. Further- more, the marginal external damage associated with this good’s production is MD = 2Q. To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should it set to achieve the social optimum?

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section10.1: Externalities And Market Inefficiency

Problem 1QQ

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The private marginal benefit associated with a product’s consumption is PMB = 360–4Q and the private marginal cost associated with its production is PMC = 6Q. Furthermore, the marginal external damage associated with this good’s production is MD =2Q. To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should it set to achieve the social optimum?
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