Suppose there is a negative externality associated with the production of aluminum due to the pollution it creates. Is the market quantity of aluminum efficient? Is there a deadweight loss associated with the market quantity? Explain in words and graphs.
If there is no deadweight loss, briefly explain why the market outcome is efficient. If there is deadweight loss, briefly explain why the market outcome is inefficient.
How does a corrective tax solve the externality problem? Is it true that the benefits of a corrective tax as a way to reduce pollution have to be weighed against the deadweight losses these taxes create?