Intervention when a negative externality exists can move the market output closer to the socially optimal level and reduce the size of the deadweight loss.

Question

Quizplus · Accepted Answer

When a negative externality exists, the market output level is higher than the socially optimal level. Government intervention, such as implementing a tax on the activity causing the externality, can reduce the quantity supplied and consumed in the market, bringing it closer to the socially optimal level. This results in a reduction in the size of the deadweight loss caused by the external cost. Therefore, intervention can lead to a more efficient outcome.

Intervention When a Negative Externality Exists Can Move the Market