Suppose the government imposes a $2 per-unit tax on an item whose production creates a negative externality. Suppose the $2 is exactly the value of the external cost. If the government uses the tax revenue to clean up pollution created by this production,
A) an optimal allocation of resources has been achieved
B) the market's equilibrium price is an efficient one
C) no externalities exist
D) there is no market failure
E) it is clear that obligatory controls have worked

Question

Quizplus · Accepted Answer

The $2 per-unit tax internalizes the external cost, leading to an optimal allocation of resources by aligning private costs with social costs.

Suppose the Government Imposes a $2 Per-Unit Tax on an Item