In order to bring a market to its efficient outcome when a negative externality is present,the government could:
A) limit total consumption to the efficient quantity.
B) tax the parties involved in the market the value of the external cost.
C) limit the price to the efficient level.
D) Any of these would bring the market to its efficient level.

Question

Quizplus · Accepted Answer

Taxing the parties involved in the market the value of the external cost is the best option to bring the market to its efficient outcome when a negative externality is present. By imposing a tax equal to the external cost, the private cost to the parties involved would include the external cost, making them bear the full cost of their actions. This would result in a shift in the supply curve and a reduction in the equilibrium quantity, bringing it to the socially optimal level. Options A and C may not be effective as they do not take into account the external cost. Option D is also correct as any of the above options would lead to an efficient outcome.

In Order to Bring a Market to Its Efficient Outcome