To eliminate the inefficiency resulting from an external cost of production, the government can impose a tax on producers that is equal to the
A) marginal external cost.
B) MC.
C) MSB.
D) MSC.

Question

Quizplus · Accepted Answer

Imposing a tax equal to the marginal external cost (MEC) internalizes the externality by making the producer bear the full cost of production, including the external cost, thus aligning private costs with social costs and eliminating the inefficiency.

To Eliminate the Inefficiency Resulting from an External Cost of Production