The strongest case for government with respect to a negative externality is that government needs to set the

Question

Quizplus · Accepted Answer

When a negative externality exists, the market outcome leads to an inefficient allocation of resources. This is because the marginal social cost (which includes the private cost of production and the external cost imposed on third parties) exceeds the marginal social benefit (which includes the private benefit enjoyed by consumers and the external benefit generated for third parties). To correct this market failure, the government can intervene by imposing a tax on the activity generating the externality equal to the marginal external cost. This tax internalizes the externality and brings the market outcome closer to the socially optimal outcome. Therefore, choice D is the best answer.

The Strongest Case for Government with Respect to a Negative