|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