Many goods are sold in plastic packaging that has harmful effects on the environment. In Figure 3, D$_1$ and S$_1$ are the free market demand for and supply of plastic packaged goods. S$_2$ would be the supply if firms took account of the cost to the environment of plastic packaging.
The government decides to implement a policy that would result in production moving from the free market level at Q$_1$ to the social optimum at Q$_2$. Which one of the following policies is most likely to achieve the government’s objective?
1 )
A subsidy at the rate P$_1$ P$_3$
2 )
A subsidy at the rate P$_2$ P$_3$
3 )
A tax at the rate P$_2$ P$_1$
A tax at the rate P$_2$ P$_3$
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