Figure 1113 Coal Burning Utilities Release Sulphur Dioxide and Nitric

Figure 11.13 Coal burning utilities release sulphur dioxide and nitric acid which react with water to produce acid rain. Acid rain damages trees and crops and kills fish. Because the utilities do not bear the cost of the acid rain, they overproduce the quantity of electricity. This is illustrated in Figure 11.13.
-Refer to Figure 11.13.S₁ represents the supply curve that reflects the private cost of production,and S₂ represents the supply curve that reflects the social cost of production.One way to internalise the external cost generated by utilities is to impose a Pigovian tax on the production of electricity.What is the size of the Pigovian tax that will internalise the cost of the externality?

A) P₀
B) P₂ - P₀
C) P₁ - P₀
D) P₂ - P₁

Correct Answer:

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