When producing a good creates pollution, an external cost, and the government imposes a tax equal to the marginal external cost, then
A) transaction costs will be high.
B) the efficient amount of the good will be produced.
C) the amount of output moves farther away from the efficient amount.
D) property rights must have already been established.

Question

Quizplus · Accepted Answer

When the government imposes a tax equal to the marginal external cost of pollution from producing a good, it internalizes the externality. This means the cost of pollution is reflected in the production cost, leading producers to adjust their output to the socially optimal or efficient level, where the marginal social cost equals the marginal social benefit.

When Producing a Good Creates Pollution, an External Cost, and the Government