When the government taxes a firm that generates an external cost,the profit-maximizing firm will produce
A) more units of output than before the tax was imposed.
B) the same number of units of output as before the tax was imposed.
C) fewer units of output than before the tax was imposed.
D) either more or fewer units of output than before the tax was imposed.

Question

Quizplus · Accepted Answer

When the government taxes a firm that generates an external cost, the cost of production increases, resulting in a decrease in the profit margin. To maximize profits, the firm will reduce the level of production to decrease the amount of the tax burden they have to bear. Therefore, the firm will produce fewer units of output than before the tax was imposed.

When the Government Taxes a Firm That Generates an External