Consider a setting in which there is a negative externality,but no positive externality. The market outcome is __________________; government can bring about the ___________________ outcome if it sets a tax equal to the __________________.

Question

Quizplus · Accepted Answer

In a setting with a negative externality but no positive externality, the market outcome is inefficient. The government can bring about the efficient outcome if it sets a tax equal to the marginal external cost (MEC). This will shift the supply curve leftward, leading to a higher price and lower quantity, reducing the negative externality and bringing about an efficient outcome. Therefore, option C is the correct answer.

Consider a Setting in Which There Is a Negative Externality,but