If the government taxes a firm that is generating an external cost,the price of the firm's product will:
A)increase and output will decrease.
B)increase and output will increase.
C)decrease and output will decrease.
D)decrease and output will increase.

Question

Quizplus · Accepted Answer

When the government taxes a firm that is generating an external cost, it increases the firm's cost of production, which will translate into higher prices for consumers. As a result of higher prices, consumers are likely to decrease their demand for the product, which would lead to a decrease in the quantity of output. Therefore, the correct answer is A.

If the Government Taxes a Firm That Is Generating an External