If the government forced external cost internalization with a tax on all firms that emit pollution, then:
A) the market would be socially inefficient because taxes create deadweight losses.
B) the market price of these goods would fall.
C) production would actually increase.
D) deadweight loss to society would decrease.

Question

Quizplus · Accepted Answer

By forcing external cost internalization with a tax on all firms that emit pollution, the firms will face an increased cost of production. This, in turn, increases the market price of these goods, which will reduce the demand for them. As a result, production will decrease, leading to a reduction in pollution. Moreover, although taxes cause deadweight losses, internalizing external costs with a pollution tax is a way to improve social efficiency, and by decreasing pollution, it reduces the deadweight loss to society. Therefore, the best answer is D.

If the Government Forced External Cost Internalization with a Tax