To eliminate the inefficiency resulting from pollution that creates an external cost,the government can impose a pollution tax on producers that is equal to the
A) MSB.
B) MC.
C) marginal external cost.
D) MSC.
E) price.

Question

Quizplus · Accepted Answer

The government can impose a pollution tax on producers that is equal to the marginal external cost of production. By doing so, it will force producers to internalize the externality, making them pay for the damages they have caused. This will increase the cost of production, reducing the quantity and increasing the price, hence reducing pollution. Therefore, the pollution tax must be equal to the marginal external cost to correct the market failure caused by the externality.

To Eliminate the Inefficiency Resulting from Pollution That Creates an External