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A-Level Economics · Negative production externality diagram question

A corrective tax shifts MPC up to MPC + tax. Through which point must the NEW curve pass to fix the market?

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The diagram

The answer

Point F. MPC + tax must cross D exactly at F, the social optimum — a tax equal to the £4 MEC does it (internalising the externality). The corrective tax makes the polluter pay the damage: MPC + tax must cross the demand curve AT the social optimum F, so the market chooses Q=3 on its own.

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This is one of 5 questions on the negative production externality diagram — every corner lettered, every wrong answer diagnosed.

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