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 private cost.
B) marginal external cost.
C) marginal social cost.
D) marginal benefit of polluting.

Question

Quizplus · Accepted Answer

The tax should be set equal to the marginal external cost to internalize the externality, ensuring that the producer accounts for the external costs in their production decisions, leading to an efficient allocation of resources.

When the Production of a Good Creates an External Cost