If a pollution tax imposed on a firm is smaller than external cost,
A)the externality is completely internalized.
B)the social production cost increases by the amount of the pollution tax.
C)the pollution tax transfers the full cost borne by people outside the firm back to the firm itself.
D)the firm is producing too much from a societyʹs point of view.

Question

Quizplus · Accepted Answer

If the pollution tax is smaller than the external cost, the firm does not fully account for the external costs in its production decisions, leading to overproduction from society's perspective.

If a Pollution Tax Imposed on a Firm Is Smaller