Given an industry is producing the socially efficient output level, a tax placed on the industry will result in inefficiency because the market will produce

Question

BlackTom AI · Accepted Answer

Here we examine what happens when a tax is imposed on an industry that is already producing at the socially efficient output level.
Option 1: 'too many units, as some units produced will have more consumer value than productive costs.' This would imply overproduction where marginal benefit exceeds marginal cost, but at the socially efficient point MB = MC, and a tax raises cost, causing the firm to reduce output, not increase it. So this depiction is inconsistent with the effect of a tax in a previously efficient market.
Option 2: 'too many units, as some units produced will have more productive costs than consumer value.' While it is true that some units could have costs exceeding benefits, the key point here is that the tax lowers net benefit at the margin and leads to reduced output, not an excess of production. Moreover, the phrase focuses on units with higher costs than value without tying it to the tax-induced shift from the efficient level.
Option 3: 'too few units, giving up some units that have more consumer value than productive costs.' This captures the core idea: when a tax is added, price to producers rises, causing output to fall below the efficient level. Some units that would have yielded net positive value (value greater than cost) are no longer produced, leading to inefficiency.
Option 4: 'too few units, giving up some units that have more productive costs than consumer value.' This option suggests the tax causes underproduction of units where costs exceed value, which would not occur at the margin that were previously efficient; the constraint from the tax is more about foregone positive-benefit units rather than allocating to only negative-net-benefit units.
In summary, the central mechanism is that taxing an output-at-efficient point lowers incentives to produce up to the point where MB = MC, causing a shortfall relative to the social optimum. The phrasing in Option 3 best aligns with that outcome, emphasizing underproduction of units that would still be valued by consumers more than their production costs. The other options either misstate the direction of the distortion (overproduction) or mischaracterize which units are forgone (those with negative net value rather to neutral or positive net value), misrepresenting how taxes interact with marginal analysis.

SP25 G202 Kreft & Mafi-Kreft Self-Test Quiz 1

Given an industry is producing the socially efficient output level, a tax placed on the industry will result in inefficiency because the market will produce

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