Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by:
A)banning production of paper.
B)compensating those injured by the externality.
C)imposing a tax on paper equal to the external cost.
D)subsidizing paper by the amount of the the external benefit.

Question

Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by: 
A)banning production of paper. 
B)compensating those injured by the externality. 
C)imposing a tax on paper equal to the external cost. 
D)subsidizing paper by the amount of the the external benefit.

Quizplus · Accepted Answer

A tax equal to the external cost would align the private MC with the social MC.

Refer to the Figure Below