Free Public Finance and Market Failure Quiz: Externalities, Pigouvian Tax, Public Goods, Tax Systems and Budget Deficits

Public Finance, Government, and Market Failure

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Chemical producers in a U.S. state release pollution that damages nearby farms. The diagram shows the market, where demand reflects both private and social benefit, $P=100-Q$, marginal private cost is $MPC=20+Q$, and each ton produced causes a constant external cost of$20.

Which statement correctly describes the market failure and its correction?

Select one option.

The market overproduces by 10 thousand tons, causing a deadweight loss of $200 thousand; a tax of $20 per ton would achieve the social optimum
The market overproduces by 10 thousand tons, causing a deadweight loss of $100 thousand; a tax of $10 per ton would achieve the social optimum
The market underproduces by 10 thousand tons; a subsidy of $20 per ton would achieve the social optimum
The market overproduces by 10 thousand tons, causing a deadweight loss of $100 thousand; a tax of $20 per ton would achieve the social optimum
There is no market failure, because the market price of $60 covers all private costs of production

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