The greater the magnitude of the external costs of production,
A)The larger is the deadweight loss from overproduction.
B)The greater would be the optimal pollution tax.
C)The further the private market solution ignoring those costs would deviate from the socially efficient level of output.
D)All of the above are true.

Question

The greater the magnitude of the external costs of production,
A)​The larger is the deadweight loss from overproduction.
B)​The greater would be the optimal pollution tax.
C)​The further the private market solution ignoring those costs would deviate from the socially efficient level of output.
D)​All of the above are true.

Quizplus · Accepted Answer

All of the options are true and interconnected. When external costs are high, the private market solution would ignore them, leading to overproduction and a socially inefficient output level. In such cases, governments can implement pollution taxes to internalize the external costs and correct market failures. The optimal pollution tax would be higher when external costs are greater because it needs to account for the amount necessary to reduce the negative effects of production.

The Greater the Magnitude of the External Costs of Production