The graph on the next page illustrates the situation in the dry cleaning market, assuming that the marginal social cost of the pollution increases as the quantity of items cleaned per week increases. The graph includes two demand curves: one for a smaller city, DS, and the other for a larger city, DL.

a. Explain why the marginal social cost curve has a different slope than the marginal private cost curve.
b. What tax per item cleaned will achieve economic efficiency in the smaller city? In the larger city? Explain why the efficient tax is different in the two cities.

Transcribed Image Text:

Price (dollars per item cleaned) S2= marginal social cost $6.60 S, = marginal private cost 5.85 5.60 5.40 5.25 5.00 Ds Quantity (items cleaned per week)