In the case of a negative externality,in order to achieve efficiency the government must set the _________________ equal to the marginal ____________________.

Question

Quizplus · Accepted Answer

In the case of a negative externality, such as pollution, the external costs are not reflected in the market price, and therefore, the market outcome is not efficient. In order to achieve efficiency, the government needs to intervene by imposing a tax on the producer equal to the amount of external costs per unit of output. This tax will shift the supply curve upward, reflecting the true social costs of production, and lead to the socially optimal level of output. Therefore, choice A, which suggests setting a tax equal to the external costs, is the correct answer.

In the Case of a Negative Externality,in Order to Achieve