In the presence of a negative externality,a specific tax can achieve the social optimum because
A) output is reduced to zero as a result.
B) it internalizes the external cost.
C) it directly charges the producer for polluting.
D) the price of the good rises by the full amount of the tax.

Question

Quizplus · Accepted Answer

A specific tax can achieve the social optimum by internalizing the external cost, which means that the producer will take into account the negative externality when making production decisions. This will lead to a reduction in the level of output, resulting in a more socially optimal outcome. However, the tax does not necessarily need to result in a reduction in output to achieve the social optimum. The key is that the tax internalizes the external cost, which can be achieved through a variety of mechanisms, including charging the producer directly for pollution or increasing the price of the good.

In the Presence of a Negative Externality,a Specific Tax Can