The private marginal benefit for commodity X is given by 10 – X where X is...

The private marginal benefit for commodity X is given by 10 – X where X is the number of units consumed. The private marginal cost of producing X is constant at $5. For each unit of X produced, an external cost of $2 is imposed on members of society.

a. In the absence of any government intervention, how much X is produced?

b. What is the efficient level of production of X?

c. What is the gain to society of moving from an inefficient level of production to an efficient level of production?

d. Suggest a Pigouvian tax that would lead to an efficient level of production?

e. How much tax revenue would the tax raise?

f. Illustrate your answers to this exercise on a diagram.

Expert Solution

Rahul Sunny answered 1 year ago

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