When the production of a good creates an external cost, to achieve the efficient quantity governments can set taxes (T) such that
A) MSC = MC + T.
B) MC = MSC + T.
C) T = MC + MSC.
D) MSC = MC - T.

Question

Quizplus · Accepted Answer

The efficient quantity is achieved when the marginal social cost (MSC) equals the marginal private cost (MC) plus the tax (T), which internalizes the external cost.

When the Production of a Good Creates an External Cost