Consider a market in which there is an external cost. A tax can be used to arrive at the efficient market equilibrium because the tax will
A) decrease supply of the good.
B) increase supply of the good.
C) decrease demand for the good.
D) increase demand for the good.

Question

Quizplus · Accepted Answer

A tax can internalize the external cost by decreasing the supply of the good, leading to a higher price and reduced quantity, thus aligning private costs with social costs and achieving efficient market equilibrium.

Consider a Market in Which There Is an External Cost