Due to a firm generating external costs, the government decides to ________ the firm. When this happens, the firm will produce ________ units of output than before the tax was imposed in order to continue maximizing profits.
A) subsidize; fewer
B) subsidize; more
C) tax; fewer
D) tax; more

Question

Quizplus · Accepted Answer

When a government taxes a firm that generates external costs, the firm faces higher production costs. To maximize profits under these new conditions, the firm will typically reduce its output, producing fewer units than before the tax was imposed. This adjustment is made to offset the increased costs associated with the tax.

Due to a Firm Generating External Costs, the Government Decides