A negative externality exists and government wants to impose a per-unit tax in order to bring about the socially optimal output. To accomplish its objective, government must set the tax equal to marginal
A)private cost.
B)social benefit.
C)external cost.
D)social cost.
E)private benefit.

Question

Quizplus · Accepted Answer

A negative externality occurs when the production or consumption of a good or service imposes costs on third parties not involved in the market transaction. To correct for this market failure and achieve the socially optimal output, the government should set the per-unit tax equal to the marginal external cost. This aligns the private cost of production with the social cost, leading producers to internalize the external costs of their actions.

A Negative Externality Exists and Government Wants to Impose a Per-Unit