Consider a setting in which there is a negative externality,but no positive externality.The market outcome is __________________; government can bring about the ___________________ outcome if it sets a tax equal to the __________________.

Question

Quizplus · Accepted Answer

In a setting with a negative externality but no positive externality, the market outcome is inefficient (as negative externalities lead to overproduction and consumption of goods). The government can bring about an efficient outcome by setting a tax equal to the marginal external cost (MEC). Thus, the correct choice is C. Choices A, D, and E are incorrect because they either have the wrong market outcome or the wrong tax to bring about the efficient outcome. Choice B is incorrect because MEC is the correct tax to address negative externalities, not marginal external benefit (MEB).

Consider a Setting in Which There Is a Negative Externality,but