When cost externalities exist,an optimal equilibrium can be attained if the government

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When cost externalities exist, the market tends to produce more than the socially optimal level, resulting in negative externalities. To correct this, the government can impose a tax on the producers equal to the difference between the private costs and the social costs (option B), which would lead the producers to internalize the external costs and in turn reduce the quantity produced. Restrictions on production (option A) and prohibition of production (option C) are extreme measures and may not be necessary if the tax is set at the optimal level. Therefore, E (Both A and B) is the best choice.

When Cost Externalities Exist,an Optimal Equilibrium Can Be Attained If