Suppose a firm pollutes a river when it produces a product.To achieve the efficient amount of output,a government could impose a ________ that equals the ________ of the pollution.
A) pollution charge; marginal social cost
B) pollution charge; marginal external cost
C) pollution tax; marginal social cost
D) pollution tax; marginal external cost
E) pollution subsidy; marginal social cost

Question

Quizplus · Accepted Answer

A pollution tax is a tax levied on firms that pollute, based on the amount of pollution they emit. The efficient amount of output occurs when the marginal social cost (MSC) equals the marginal private cost (MPC) plus the marginal external cost (MEC) (i.e., the cost of the negative externality). Therefore, to achieve the efficient amount of output, a government could impose a pollution tax that equals the marginal external cost of the pollution, which is represented by answer choice D.

Suppose a Firm Pollutes a River When It Produces a Product.To