Question

The fumes from dry cleaners can contribute to air pollution. Suppose the following diagram illustrates the situation in the dry cleaning market

Q1: Explain how a goverment can use a tax on dry cleaning to bring about the efficient level of production.

- A: The government can use a tax to increase the marginal private cost of producing dry cleaning to equal thr marginal social cost

Q2: What should the value of the tax be? Tax should be $_____ per unit.

(Enter your response rounded to two decimal places.)

Q3: How large is the deadweight loss (in dollars) from excessive dry cleaning, according to the figure? The deadweight loss is $______ thousand.

(Enter your reponse as an integer.)

18.00 Sz= marginal social cost 16.00 Si= marginal private cost 10.00- Price (dollars per item cleaned) 4.00 2.00 - TTTTTT 200 400 600 800 1000 1200 1400 1600 1800 Quantity (items cleaned per week in 1000s)

Answer 1

2. Tax should be $6 per unit.

3. The deadweight loss = 0.5[($12 - $6) * (800 - 500)] = $900