Reference no: EM132512014

Greenwood has 100 houses, each surrounded by beautiful trees. In the fall, these trees drop their leaves, and the residents of Greenwood must gather up the leaves surrounding their homes, so the City of Greenwood can remove them.

Residents can gather their leaves with either a rake or a gasoline powered leaf blower. It takes a resident 20 hours to gather leaves with a rake, but only 10 hours with a leaf blower. All residents own a rake, and each can also rent a leaf blower for $120. Residents only rent a leaf blower if the value of the time they save by using the blower instead of the rake exceeds the rent for the blower.

The table below gives the distribution among residents of the opportunity cost of an hour of time.

Opportunity cost of an hour of time -> Number of residents

$50 25

$40 25

$30 25

$20 25

A leaf blower saves time, but it is very noisy.

Operating a leaf blower imposes one dollar of external cost on every resident.

Suppose that the City of Greenwood imposed a tax on leaf blowers that internalizes the external cost of leaf blowers.

How would this tax change total social profit (including external costs and taxes) of Greenwood residents?

a. Total social profit would increase by $500.

b. Total social profit would increase by $2,500.

c. Total social profit would not change.

d. Total social profit would increase by $5,000.

e. Total social profit would decrease by $10,000.