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

Question

Quizplus · Accepted Answer

Imposing a pollution tax on producers that is equal to the marginal external cost would internalize the externality, as it would force the producers to consider the full cost of production, including the negative externalities they create. By doing so, the producers would reduce their pollution levels to the point where the marginal cost of reducing an additional unit of pollution is equal to the marginal external cost. This would result in a socially optimal level of pollution, and efficiency would be achieved. Therefore, the correct answer is (C) marginal external cost.

To Eliminate the Inefficiency Resulting from Pollution That Creates an External