Suppose a firm pollutes a river with harmful chemicals when it produces a product. To achieve the efficient amount of output, the government could impose a that equals the of the pollution.

tax; marginal external cost

Explanation:

Here are the options to this question :

tax; marginal external cost

subsidy; marginal social benefit

tax; marginal social benefit

subsidy; marginal external benefit

Externality is when the activities of economic agents affect third parties not involved in the economic activity.

Negative externality is when the benefits of economic activities to third parties is less than its cost.

An example of an activity that generates negative externality is pollution. The aim of government would be to reduce pollution. To do this, the government would tax the economic agent involved in the pollution an amount equal to the marginal external cost. Taxes increases cost of pollution to the party involved in causing the pollution and thus would act as an incentive for the firm to reduce pollution produced.

Postive externality is when the benefits of economic activities to third parties exceeds the costs.

Government can encourage the production of activities that generate positive externality by providing subsides at an amount equal to the marginal external benefit

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