Question

In order to bring a market to its efficient outcome when a negative externality is present, the government might:

limit the price of the good or service to its efficient level.

tax the buyers or sellers in the market at the value of the external cost.

limit total consumption to the efficient quantity.

All of these are actions the government might take to bring about an efficient outcome.

Answer 1

Answer is B. Tax the buyers or sellers in the market at the value of external cost.

As shown ib below diagram MSC is marginal social cost and MPC is marginal private cost. Efficient output level is Q2 where marginal benefit and MSC meets.

To reduce the production government should tax on buyer or seller. Here per unit tax of A-B should be levied. It is equal to per unit negative externality. It will bring the production to efficient output level.

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