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

Question

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

BlackTom AI · Accepted Answer

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 tax revenue, potentially reducing overall DWL; in others, it can create a new DWL component. Without the exact pre-tax quantities and demand/supply curves, this numeric claim needs careful cross-checking against the specific graph or data from the previous question. So, as a standalone statement, it asserts a precise increase, which would require confirmation from the underlying numbers.
Option 2: 'increase by $11M'. Similar to Option 1, this asserts a specific DWL change. The logic for DWL under a Pigovian tax is not universally fixed; if the tax moves output closer to the efficient level, DWL may fall, not rise. If the tax raises the tax burden without sufficiently contracting output, DWL could rise or fall depending on the elasticities and the initial gap. The $11M figure would need to align with the exact numerical relationship from the pre-tax DWL to the post-tax DWL, given the taxed quantity and price effects. Absent those details, this option claims a particular magnitude that may or may not be supported by the data.
Option 3: 'decrease to $0'. This would occur if the Pigovian tax perfectly eliminates all deadweight loss, which would typically require perfectly efficient pricing or a competitive outcome, not a monopolist under a Pigovian correction unless the tax compresses the monopoly’s output to the socially optimal level with no remaining distortion. In most monopoly-plus-Pigovian scenarios, some DWL remains unless the tax drives output exactly to the socially optimal quantity and the marginal social cost equals marginal social benefit at that point. Therefore, a claim that DWL falls to zero is generally unlikely unless the underlying model specifies that exact condition.
Option 4: 'remain the same as before the tax was imposed'. This would suggest the Pigovian tax has no effect on DWL, which contradicts the standard intuition that a tax correcting externalities changes incentives and output, thereby altering the deadweight loss. If the tax were perfectly neutral with respect to the monopolist’s output decision, or if the pre-tax DWL was zero (which would be the case in a perfectly competitive market, not a monopoly), this could hold. But for a monopoly facing a Pigovian tax, we usually expect some change in DWL due to altered output and pricing incentives.
In summary, the options present competing claims about how a Pigovian tax shifts the deadweight loss in a monopoly setting. The precise outcome hinges on parameters from the prior question (the level of monopoly output, the social optimum, elasticities, and how the tax changes marginal revenue and marginal cost). The logic behind each option reflects common pitfalls: assuming fixed DWL regardless of policy, presuming DWL must vanish, assuming a fixed numerical increase without tying to the model, or recognizing that the tax can either reduce or reallocate the DWL depending on the efficiency of the output adjustment.

ECON4330850.1251 Exam 1

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

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