Questions
Questions

ECON4330850.1251 Exam 1

Single choice

Reconsider the monopoly situation as presented in the previous question.  If a Pigovian tax were levied on the monopolist, the dead weight loss would

Options
A.increase by $8M
B.increase by $11M
C.decrease to $0
D.remain the same as before the tax was imposed
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Step-by-Step Analysis
Let’s break down the scenario step by step, focusing on how a Pigovian tax affects a monopolist and the associated deadweight loss (DWL). Option 1: 'increase by $8M'. This choice implies that the DWL grows by a specific amount due to the tax. The Pigovian tax is intended to correct the negative externality by lowering output toward the socially optimal level, which typically reduces DWL caused by the monopoly’s output inefficiency. If the tax reduces output toward the efficient quantity, DWL can shift in a way that, relative to the pre-tax monopoly, either decreases or increases depending on the starting gap between monopoly and social optimum. In some configurations, the tax can transform part of the deadweight loss into t......Login to view full explanation

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Another policy approach to externalities is for government to levy a tax or place a charge specifically on the related good.

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