When the production of a good creates an external cost, in order for taxes to be effective in achieving the efficient allocation of resources, the tax must be set equal to the
A) marginal external cost.
B) marginal social cost.
C) marginal benefit of polluting.
D) marginal private cost.

Question

Quizplus · Accepted Answer

Taxes should be set equal to the marginal external cost to correct for the externalities and achieve an efficient allocation of resources. This ensures that the price of the good reflects its true cost to society, including the external costs not accounted for in the market price.

When the Production of a Good Creates an External Cost