To internalize a consumption externality in the market for a toxic chemical

Question

Quizplus · Accepted Answer

A unit tax can be imposed equal to ‒MEB to internalize a consumption externality in the market for a toxic chemical. This will increase the price of the good and reduce the quantity demanded, leading to a decrease in the negative externalities associated with its consumption. A unit subsidy, as in option A, would incentivize more production and consumption, exacerbating the externality problem. Option C suggests setting the tax equal to the MSC, which could overshoot the optimal level of taxation required to internalize the externality. Option D cannot be the answer because at least one of the given options is a correct choice.

To Internalize a Consumption Externality in the Market for a Toxic