A tax equal to the external cost on firms that emit pollutants would:

Question

Quizplus · Accepted Answer

A tax equal to the external cost would increase the cost of production for firms emitting pollutants, providing them with the incentive to decrease their level of activity emitting the pollutants. This would make environmentally damaging production methods relatively more expensive, incentivizing firms to search for less damaging methods. Therefore, choice (B) is the best option. Choices (A), (C), and (D) are incorrect as they contradict the basic economic rationale for imposing a tax on externalities.

A Tax Equal to the External Cost on Firms That