Answer to Question #310168 in Microeconomics for Aazzaa

Question

Explain with the help of the diagram provided, how the government can internalize the negative externalities in production.

Answer 1

The government can internalize negative externalities by imposing tax. The socially efficient level of output exists where the Social marginal cost (SMC) is equal to Social Marginal Benefit (SMB). This happens at Q2. The tax equals the external cost of production.