When the production of a good creates an external cost, by setting the tax rate equal to the ________, firms can be made to behave in the same way as they would if they bore the cost of the externality directly.
A) marginal external cost
B) marginal social benefit
C) marginal private benefit
D) marginal social cost

Question

Quizplus · Accepted Answer

Setting the tax rate equal to the marginal external cost internalizes the externality, making firms account for the external cost in their production decisions.

When the Production of a Good Creates an External Cost