Figure 9.9 depicts a market for electricity. S1 is the supply curve without the external costs. S2 is the supply curve with the $T tax. Assume electricity production incurs external costs. If the government imposes a pollution tax of $T per mega watt:
A. the equilibrium price of electricity increases but the equilibrium output decreases.
B. the equilibrium price of electricity decreases but the equilibrium output increases.
C. both the equilibrium price and output increase.
D. both the equilibrium price and output decrease.
Answer: A
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