CIMA BA1 · Chapter 8 · Question 4 of 9
A Pigouvian tax intended to correct a negative production externality should ideally be set equal to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) The marginal external cost at the socially optimal level of output
Explanation
A Pigouvian tax internalises the externality by adding the external cost to the firm's private costs. Setting it equal to marginal external cost at the optimum moves the private supply curve to coincide with marginal social cost, so the market produces the socially optimal output.
More Market failure, externalities and competition policy MCQs
- Q6In a market, demand (marginal social benefit) is P = 120 - Q and marginal private cost is P = 20 + Q. Production causes a constant…
- Q7Which of the following is a typical function of a national competition authority?
- Q8A natural monopoly is most likely to arise when:
- Q9Which of the following is an argument AGAINST the privatisation of a state-owned utility?
- Q1A pure public good is characterised by being: