Perfectly competitive equilibrium price of petai in malaysia

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a. The consumption of petai (also known as the stink beans) creates a negative externality by causing bad breath. Suppose that the negative external social cost created by petai is equal to $2 per kilogram. The perfectly competitive equilibrium price of petai in Malaysia is $5 per kilogram.

b. An ECW1101 student suggests an alternative policy. She says that if the government puts a $2 per kilogram tax on petai then this will maximise social surplus. Is she correct? If she is correct, show the social gain under the student's policy compared to the perfectly competitive equilibrium. If the student is incorrect, show the deadweight loss under her policy.

Reference no: EM132482379

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