A tax may be used as a corrective device in the case of a negative externality...
A tax may be used as a corrective device in the case of a negative externality because it will __________ marginal private costs and __________ supply.
a. increase; decrease
b. increase; increase
c. decrease; decrease
d. decrease; increase
Homework Answers
Answer is (b) Increase; Increase
Taxes will increase the marginal private costs and decrease the supply. Imposing taxes will simply increase the costs of production. All the raw materials (Inputs) are prices higher will ultimately hike up the final costs of any product. Thus the marginal private costs get increased by this phenomenon.
While having the costs increased, the producer will have less money in hand and he’ll have to reduce the supply to survive. Even on the other hand, consumer will have their demand decreased because of the increase in prices. So, the product wouldn’t increase his production when he knows the market will go down for a little while now.
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A tax may be used as a corrective device in the case of a
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