Question

A country decides to impose a tax to reduce the external cost created by carbon emissions. Prior to the​ tax, ______, and as a result of the​tax, _______.

A.

marginal cost equals marginal​ benefit; marginal cost will be less than marginal benefit

B.

market failure​ occurred; producer surplus will equal consumer surplus

C.

producer surplus equals consumer​ surplus; marginal cost equals marginal benefit

D.

market failure​ occurred; the deadweight loss is reduced

E.

there was no deadweight​ loss; a market failure occurs because taxes reduce production

Answer 1

D. Market failure occurred because marginal social cost is greater than MPC due to presence of externalities. When taxation is levied to correct the negative externality, deadweight loss is reduced.