An intensive pig farming cooperative in East Anglia discharges untreated slurry into a local river network, causing severe eutrophication. This has decimated the local wild trout population, severely impacting local angling clubs, and increased the purification costs for the regional water utility company by £120,000 annually. The government introduces a specific tax on slurry discharge equal to the marginal external cost of the pollution.
Which one of the following is the most likely economic effect of this tax?
It shifts the marginal social cost (MSCMSCMSC) curve downwards to align with the marginal private cost (MPCMPCMPC) curve.
It internalises the negative externality by shifting the private firm's marginal private cost (MPCMPCMPC) curve upwards.
It increases the deadweight welfare loss associated with the overproduction of pork.
It shifts the marginal social benefit (MSBMSBMSB) curve upwards to equalise private and social benefits.
