A tax on a polluting activity could internalize the externality if it were set equal to the
A)average cost of the pollution.
B)marginal cost of the pollution.
C)total cost of the pollution.
D)moral cost of the pollution

Question

Quizplus · Accepted Answer

Setting the tax equal to the marginal cost of the pollution would internalize the externality by making the polluter internalize the cost of the pollution they create on society. The tax would create an incentive for the polluter to decrease their pollution as long as the cost of doing so is less than the tax. A tax set at the average or total cost would overcompensate for the externality and potentially harm the economy. A moral cost cannot be quantified and therefore cannot be used as the basis for setting a tax.

A Tax on a Polluting Activity Could Internalize the Externality