Practice question · True or false
A Pigouvian tax on pollution is set equal to the marginal external cost at the socially optimal quantity.
Hints
- The charge should equal the external harm at the efficient quantity.
- That makes the producer face the full social cost.
Show the answer
True
Why
The tax internalises the externality: at . The firm now faces the true social cost of production.
Practise Externalities and Public Goods
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