The widget industry is competitive and a source of localized air pollution (the pollution affects only people who live near widget factories). The following graph shows the demand for widgets and the private and social marginal cost curves.

a. Suppose there has always been a Pigou tax, and that people have always lived near widget factories. One day the Pigou tax is eliminated, and all these neighbors move away. Fill in these blanks: The cost of moving must be greater than __________ but less than __________.
b. Instead of the assumptions in part (a), assume that there has never been a Pigou tax and that the factories still have neighbors. Assume also that if there were a Pigou tax, all of the revenue would be spent on entirely worthless projects. Which areas would you want to measure in order to determine whether a Pigou tax is an efficientpolicy?

Transcribed Image Text:

MCi MCprie Price Quantity