What is the effect of a tax on a good with a negative externality, set equal to the external cost?
Answer and explanation
Correct answer: A. It makes the market pay the full social cost
- Step 1: A tax equal to the external cost makes private cost equal to social cost. Step 2. The market then produces less of the harmful good. Answer: it internalises the external cost. Why not the others: The tax does not raise quantity, and it does not remove all pollution.
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