In order to achieve social efficiency, the size of an effluent tax should be based on:

Question

Quizplus · Accepted Answer

The size of an effluent tax should be based on the external cost created by the pollutant. This is because the goal of an effluent tax is to internalize the externality by making firms pay for the damage they cause to the environment. The tax should be equal to the marginal external cost, which is the cost imposed on society by each additional unit of pollution.

In Order to Achieve Social Efficiency, the Size of an Effluent