In the presence of an negative externality,a specific tax can achieve the social optimum because
A) output is reduced to zero as a result.
B) it internalizes the external cost.
C) it directly charges the producer for polluting.
D) the price of the good rises by the full amount of the tax.

Question

Quizplus · Accepted Answer

A specific tax on a good or activity that generates negative externalities internalizes the cost of the externality by making it a direct cost to producers. This causes the supply curve to shift upward, leading to a higher market price, and a lower quantity of the good produced, which achieves the socially optimal level of output.

In the Presence of an Negative Externality,a Specific Tax Can