If the production of a product creates external costs, there is an ____ to production of that good which the government can correct for by ____.
A)overallocation of resources; granting a subsidy
B)overallocation of resources; imposing a per-unit tax
C)underallocation of resources; granting a subsidy
D)underallocation of resources; imposing a per-unit tax

Question

If the production of a product creates external costs, there is an ____ to production of that good which the government can correct for by ____.
A)​overallocation of resources; granting a subsidy
B)​overallocation of resources; imposing a per-unit tax
C)​underallocation of resources; granting a subsidy
D)​underallocation of resources; imposing a per-unit tax

Quizplus · Accepted Answer

The statement mentions that the production of the product creates external costs, which implies that the price of the good does not reflect its true cost to society. This leads to overallocation of resources towards its production. To correct for this, the government can impose a per-unit tax on the product, which would increase its price and reduce the quantity demanded. This would internalize the external costs and bring the market towards an efficient allocation of resources. Hence, option B is the correct choice.

If the Production of a Product Creates External Costs, There