In the first- best world, where there are no other market distortions, the problem of externalities can be corrected by imposing a tax equal to MSC and a subsidy equal to MSB.

Question

Quizplus · Accepted Answer

In the first-best world, externalities can be corrected by imposing a tax equal to the difference between the marginal social cost (MSC) and the marginal private cost (MPC), or by providing a subsidy equal to the difference between the marginal social benefit (MSB) and the marginal private benefit (MPB), not by imposing a tax equal to MSC and a subsidy equal to MSB directly.

In the First- Best World, Where There Are No Other