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How can the government correct a negative externality?

Posted on April 18, 2014 at 9:45 AM

Negative externalities exist when the marginal social costs (MSC) exceed the marginal social benefits (MSB). Society is getting too much of the good at too low of a price.

 

The government can correct a negative externality by imposing per-unit taxes on producers to raise the costs of production. This way the MSC=MSB. Another policy option is to tax buyers so that the MSC=MSB. In the end, the correction will eliminate deadweight loss from the market.

 

AP Microeconomics Unit 4 Role of Government

Categories: AP Microeconomics, Micro Unit 4 Role of Government

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