Assume that production from an electric utility caused acid rain.If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would

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Quizplus · Accepted Answer

Imposing a tax on the utility equal to the cost of the acid rain is a way of internalizing the externality. By doing so, the firm is now directly absorbing the cost of the negative externality, making the total cost of production reflect its true cost to society. This can incentivize the firm to reduce their pollution output to avoid paying the tax, which can lead to a more socially optimal outcome.

Assume That Production from an Electric Utility Caused Acid Rain