Consider the information in the file HW7 Negative Production Externality. The allocatively efficient amount of production is units. Therefore, without any government policy, the production of this good would result in a deadweight loss of dollars. To solve the externality problem, the government imposes a Pigouvian tax on the producers in this industry. The total tax collected by the government equals dollars, which it pays to the affected parties to compensate them for the harmful effects of the externality. As a result, total external cost equals dollars.
Production of a commodity in a perfectly competitive market imposes $40 of marginal external cost on the society. The following graph shows the marginal private cost (same as supply) and marginal private benefit (same as demand) functions. The total tax collected by the government equals 60000.00 dollars, which it pays to the affected parties to compensate them for the harmful effects. As a result, total external cost equals 120000.00 dollars.
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