A tax equal to the external marginal cost of an activity yields the efficient level of production because the tax
A) achieves the competitive equilibrium.
B) forces producers to face all costs of production including the external cost.
C) ensures greater profits for the firm.
D) eliminates all pollution.

Question

Quizplus · Accepted Answer

The tax internalizes the external cost, making producers account for the full social cost of production, leading to an efficient level of output.

A Tax Equal to the External Marginal Cost of an Activity