Bob’s Bees is a small boutique honey manufacturer in Massachusetts. Bob’s neighbor is Jon’s Jams. The more honey Bob produces, the more jam Jon is able to produce; that is, there is a positive production externality.
a. Suppose that the government of Massachusetts imposes a new tax on jam and honey production. Will the deadweight loss of this tax be greater, smaller, or the same as if there were no production externality? Explain.
b. How would your answer change if the production externality were negative (perhaps because Bob’s bees sting Jon’s jam makers)?