If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on the good will:
A) reduce the number of firms producing that good in the long run.
B) increase the number of firms producing that good in the long run.
C) reduce the number of firms producing that good in the short run.
D) increase the number of firms producing that good in the short run.

Question

Quizplus · Accepted Answer

A tax on the good will increase production costs, leading to reduced profitability. In the long run, less efficient firms may exit the market, reducing the number of firms.

If Markets Are Perfectly Competitive and Production of a Good