If a firm's production process generates external costs, the firm will produce the socially efficient level of the output if the government imposes a tax equal to the marginal

Question

Quizplus · Accepted Answer

If a firm's production process generates external costs, then the social cost (including both private and external costs) will be greater than the private cost. To achieve the socially efficient level of output, the government can impose a tax equal to the marginal damage cost. This tax will increase the private cost to the level of the social cost, and the firm will reduce its output to the socially efficient level. Therefore, the answer is A, as taxing the external cost will lead to the socially optimal level of output.

If a Firm's Production Process Generates External Costs, the Firm