A tax equal to the external marginal cost of an activity yields the efficient level of production because the tax
A) forces producers to face all costs of production including the external cost.
B) achieves the competitive equilibrium.
C) ensures greater profits for the firm.
D) eliminates all pollution.

Question

Quizplus · Accepted Answer

A tax equal to the external marginal cost makes producers account for the external costs (e.g., pollution) they impose on society, aligning private costs with social costs and leading to an efficient production level.

A Tax Equal to the External Marginal Cost of an Activity