Refer to the previous question but assume that the government has imposed a per-unit tax on this product that is exactly equal to the marginal damage costs. Use the diagram to show what will happen to production, output, and price.

Data from previous question

The following diagram represents the profit-maximizing price and output for a firm in a perfectly competitive industry with no externalities. Use this diagram to explain

what will happen if the production of the product imposes external costs on society and these costs are not factored into production decisions.

Transcribed Image Text:

Price per unit ($) P* 0 Units of output q* MC