CA Foundation · Business Economics · Public Finance
A steel plant in Odisha has a private marginal cost of Rs 400 per tonne and causes pollution damage of Rs 90 per tonne to nearby villages. The government imposes a Pigouvian tax equal to the external damage on each tonne. After the tax, the plant's effective marginal cost per tonne is:
The effective marginal cost becomes Rs 490 per tonne. A Pigouvian tax equals the external damage of Rs 90, and adding it to the private marginal cost of Rs 400 makes the firm bear the full social cost, thereby internalising the externality.
- ARs 310
- BRs 400
- CRs 490Correct
- DRs 580
Explanation
A Pigouvian tax is set equal to the marginal external cost, which is Rs 90. The firm's effective marginal cost becomes 400 + 90 = Rs 490, which equals the social marginal cost. Rs 310 wrongly subtracts the tax, and Rs 400 ignores it.
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