May/June 2026 Paper 32

2026 · 30 questions · 30 parts · 30 marks

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11ExternalitiesMedium1 mark
A chemical firm produces toxic fumes that impose costs on society. The diagram shows the free market equilibrium of the firm’s product at .
diagram with price on the vertical axis and quantity on the horizontal axis, showing an upward-sloping marginal social cost (MSC) curve above an upward-sloping marginal private cost (MPC) curve, and a downward-sloping marginal private benefit (MPB) curve; MPC and MPB cross at point Y, giving the free-market price P1 and quantity Q1; MSC and MPB cross at point X, giving the socially optimal price P2 and quantity Q2, with Q2 to the left of Q1 and P2 above P1
The government imposes a tax on the firm of XY. How would this improve resource allocation?