What would happen if the government tries to internalize an externality,generated from the production of a commodity,through taxation?
A)The commodity will be overproduced
B)The commodity will definitely be underproduced
C)The market level of output will coincide with the efficient level
D)The price of the commodity will decline

Question

Quizplus · Accepted Answer

By internalizing the externality through taxation, the government makes the producers of the commodity pay for the negative externality they generate. This increases the cost of production and reduces the supply of the commodity. As a result, the market level of output will coincide with the efficient level, where the marginal social cost of producing the commodity equals the marginal social benefit. The price of the commodity will also increase due to the higher production cost, but the overall effect on price cannot be determined without knowing the elasticity of demand.

What Would Happen If the Government Tries to Internalize an Externality,generated