Suppose the government imposes a per unit tax on an item whose production process creates a negative externality. Suppose the tax is exactly the value of the marginal externality cost. If the government now uses the tax revenue to clean up pollution from this process, the market will:

Question

Quizplus · Accepted Answer

By imposing a tax equal to the marginal externality cost and using the revenue to clean up pollution, the government is effectively incentivizing producers to internalize the cost of the negative externality. This means that the market will now take into account all costs and benefits, leading to an efficient outcome.

Suppose the Government Imposes a Per Unit Tax on an Item