Answer :
The imposition of a per-unit tax on electricity producers increases their cost of production by $5 per unit. As a result, the supply curve shifts upward by the amount of the tax. This leads to a decrease in the equilibrium quantity of electricity produced and consumed in the market.
Since electricity producers create a negative externality equal to $5 per unit, the socially optimal quantity of electricity to be produced is less than the equilibrium quantity to account for the negative externality. When the government imposes the $5 per-unit tax, it effectively internalizes the externality by making producers pay for the negative impact they impose on society. This tax-induced decrease in production brings the after-tax equilibrium quantity closer to the socially optimal quantity.
Therefore, the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced is:
c. The after-tax equilibrium quantity is less than the socially optimal quantity.
Since electricity producers create a negative externality equal to $5 per unit, the socially optimal quantity of electricity to be produced is less than the equilibrium quantity to account for the negative externality. When the government imposes the $5 per-unit tax, it effectively internalizes the externality by making producers pay for the negative impact they impose on society. This tax-induced decrease in production brings the after-tax equilibrium quantity closer to the socially optimal quantity.
Therefore, the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced is:
c. The after-tax equilibrium quantity is less than the socially optimal quantity.
