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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

When the government levies a tax on a good equal to the external cost associated with the good’s production, it ______ the price paid ________ by consumers and makes the market outcome ________ efficient.

a. increases, more

b. increases, less

c. decreases, more

d. decreases, less

To determine
Tax and externality.

Explanation

Option (a):

When the government levies a tax on a good equal to the external cost associated with the good’s production, it increases the price paid by consumers and makes the market outcome more efficient. That is, the imposition of tax on the external cost created by a commodity will lead to an increase in the price of that commodity. When the government imposes tax on goods equal to the external cost, it leads to the market outcome becoming more efficient. Thus, option “a” is correct.

Option (b):

When the government imposes tax on goods equal to the external cost, it leads to the market outcome becoming more efficient...

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