In a Market with External Costs, Suppose the Efficient Level

question 235

Multiple Choice

In a market with external costs, suppose the efficient level of output is 1,000 units. Which statement is TRUE?

• A) To achieve the efficient level of output, the government should set a subsidy equal to the external cost.
• B) To achieve the efficient level of output, the government could set a tax equal to the external cost or issue enough tradable allowances to restrict the output to the efficient level.
• C) With external costs, the government can use only taxes to achieve the efficient level of output.
• D) With external costs, the government can use only tradable allowances to achieve the efficient level of output.

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