The idea behind the pollution tax equal to the external cost per unit of pollution is to
A) increase the social benefit to be above the marginal cost.
B) internalize the externality.
C) allow the firm to evade external costs.
D) drive polluting firms out of developed countries.

Question

Quizplus · Accepted Answer

The pollution tax is designed to internalize the externality, meaning that it includes the external costs of pollution as a cost to the firm producing it. This gives the firm an incentive to reduce its pollution levels, as it is now paying the full social cost of pollution. The goal is not to drive polluting firms out of developed countries, but rather to encourage all firms to adopt more socially responsible practices. The tax is set at the external cost per unit of pollution to ensure that the social benefit is greater than the marginal cost. Allowing firms to evade external costs would defeat the purpose of the tax.

The Idea Behind the Pollution Tax Equal to the External