If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on that good will:
A) increase both the price of that good and pollution.
B) reduce the price of that good and increase pollution.
C) reduce both the price of that good and pollution.
D) increase the price of that good and reduce pollution.

Question

Quizplus · Accepted Answer

A tax on a good that causes pollution internalizes the external cost, leading to a higher price for the good and a reduction in pollution as producers reduce output to avoid the tax.

If Markets Are Perfectly Competitive and Production of a Good