-Refer to the diagram above.Assume that a Coase theorem solution (private negotiation)is impractical.The efficient equilibrium could be achieved by
A) banning production of the good.
B) compensating those injured by the externality.
C) taxing the good by an amount equal to the external cost.
D) subsidizing the good by an amount equal to the external benefit.
E) informing the public of the external cost produced by production of the good.

Question

-Refer to the diagram above.Assume that a Coase theorem solution (private negotiation)is impractical.The efficient equilibrium could be achieved by
A) banning production of the good. 
B) compensating those injured by the externality. 
C) taxing the good by an amount equal to the external cost. 
D) subsidizing the good by an amount equal to the external benefit. 
E) informing the public of the external cost produced by production of the good.

Quizplus · Accepted Answer

Taxing the good by an amount equal to the external cost internalizes the externality, aligning private costs with social costs and achieving an efficient equilibrium.

-Refer to the Diagram Above