An external cost would cause _______ production of the good and may require a _______ to internalize the externality into the market.
A) too much; tax
B) too much; subsidy
C) too little; tax
D) too little; subsidy

Question

Quizplus · Accepted Answer

External costs lead to overproduction of a good because the market does not account for the negative impacts on third parties. A tax can help internalize this externality by making the producer bear the full cost, thus reducing production to a more socially optimal level.

An External Cost Would Cause _______ Production of the Good