CA Foundation · Business Economics · Public Finance
A steel plant's private marginal cost of producing a tonne of steel is Rs 8,000, while the pollution it causes imposes an external cost of Rs 1,500 per tonne on nearby residents. To make the plant produce the socially efficient output, the government should levy a Pigouvian tax per tonne of:
The Pigouvian tax should be Rs 1,500 per tonne, equal to the marginal external cost. It makes the producer bear the pollution cost, raising its effective marginal cost to Rs 9,500, the social marginal cost, and moves output to the efficient level.
- ARs 9,500
- BRs 8,000
- CRs 1,500Correct
- DRs 6,500
Explanation
A Pigouvian tax equals the marginal external cost, so that private marginal cost plus tax equals social marginal cost (8,000 + 1,500 = 9,500). The tax is therefore Rs 1,500. Rs 9,500 wrongly taxes the whole social cost.
Did you get it right without looking?
One question tells you little. A timed set on Public Finance shows your real accuracy, how long you take and where you lose marks.
More Public Finance questions
- A chemical factory in an industrial town discharges effluents into a river, harming the fishing income of villagers downstream. The factory …
- Which of the following is the main reason governments typically finance pure public goods through general taxation rather than leaving them …
- For a public good, the individual marginal benefits of three residents at a given quantity are Rs 40, Rs 25 and Rs 15. What is the social ma…
- In a government budget, total revenue receipts are Rs 2,000 crore, recovery of loans and other non-debt capital receipts are Rs 100 crore, a…
- Which of the following is a direct tax in India?
- A toll-free village road is rarely congested. Which classification fits the road at this stage, considering use by additional vehicles?