A policy maker is unsure of the true marginal damages associated with a good, but they know that the marginal externality is constant and somewhere between $10 and $50 per unit, so the regulator imposes a tax of $35. Even though the tax rate might be wrong, the regulator knows that imposing the tax raises social welfare compared to having no tax at all.

O True

O False

Question

Business

Jenny Rich

3 July, 00:51

A policy maker is unsure of the true marginal damages associated with a good, but they know that the marginal externality is constant and somewhere between $10 and $50 per unit, so the regulator imposes a tax of $35. Even though the tax rate might be wrong, the regulator knows that imposing the tax raises social welfare compared to having no tax at all.

O True

O False

+3

Answers (1)

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Antoine Rollins · Answer 1

Answer: True

Explanation:

Marginal externality is constant. However, it may not be calculated with accuracy. Hence, there's need for estimates at reasonable levels.

Hence, the policymaker's estimate of $35 / unit is reasonable and within the acceptable range of between $10 and $50/unit. Also, the tax charge raises social welfare compared to no tax at all.