Question 12

Price Quantity Figure 9 Demand curve and marginal private and social cost curves Towards the right of Figure 9 are two circular red markers with a line between them that you can use to draw a MCp+ t curve on Figure 9. You can move the markers with the mouse by clicking on them and dragging. Alternatively, you can tab to each marker and then use the keyboard arrow keys. Figure 9 shows a perfectly competitive market for a good. The supply curve S is also the sum of the firms' marginal private cost curves. The firms in this market create pollution, the costs of which do not enter into the firms' costs. The line labelled MCs is the sum of the firms' marginal social cost curves, including the costs of their pollution borne by others. Assume the government decides to impose a Pigovian tax, t. Drag the line into an appropriate place on the diagram to ensure a socially optimal level of production of the good.